For February, investors are focused on stock market volatility, the Fed tightening rates, and how much the economy is slowing. However, an equally important development is taking place in the background that will have major implications for certain stocks: the Covid-19 variant Omicron wave has peaked and is now rapidly receding.
As the chart above shows, the 7-day moving average of new cases peaked just above 800,000 and is currently around 440,000. There are some other positives about omicron such as it being milder than previous strains and the very low hospitalization and death rates for vaccinated and/or boosted people. Further, there is some hope that all the detected and undetected omicron infections could bring us closer to “herd immunity”.
The biggest winner of these developments is the travel industry. Travel stocks have sold off in recent weeks with the Defiance Hotel, Airline, and Cruise ETF (CRUZ) down about 15% since early November in part due to omicron and also with the broad market weakness. Therefore, investors should consider stocks that will benefit from travel volumes picking up such as Wyndham Hotels (WH), Bluegreen Vacation Holdings (BVH), and Travelzoo (TZOO).
Wyndham Hotels (WH)
WH is one of the world’s largest hotel companies. Currently, it has around 9,000 hotels in 95 countries. WH operates in two segments: Hotel Management; and Hotel Franchising. The Hotel Management segment offers management services for full and limited-service hotels. The Hotel Franchising segment licenses its lodging brands and provides related services to third-party hotel owners.
Clearly, WH will be one of the biggest beneficiaries of a rebound in travel. This is evident from the company’s revenue in Q1 and Q2 of 2021 exceeding its 2019 revenue figures before growth slowed in Q3 due to the delta variant and likely also in Q4.
Coming out of the pandemic, WH is in a much stronger position as many smaller hotels were shuttered, while others are running below full capacity due to difficulty finding labor. As a multinational, multibillion-dollar company, WH is able to absorb these inflationary pressures and increase market share to take advantage of the inevitable improvement in operating conditions that should emerge during the Spring and Summer of this year.
Beyond improving macro conditions, we can also see that WH is one of the best operators in the segment by looking at its recent earnings report. In Q3, WH’s net revenue increased 37.4% to $463 million. Its adjusted EPS increased 222.2%
The company also pays a 1.5% dividend yield and has 12.8% profit margins which are both above the industry average and average stock in the S&P 500. For Q4, analysts are forecasting $383 million in revenue, a 29.7% increase from last year, and for EPS to reach $0.53 per share.
WH has an overall rating of B, which translates to Buy in the POWR Ratings. B-rated stocks have posted an average annual performance of 20.1% which outpaces the S&P 500’s average annual return of 7.8%. The stock has an A for Growth which isn’t surprising given its double-digit revenue growth and earnings growth. Next year, analysts are projecting another 10% in revenue growth. Click here to see more information about WH’s POWR Ratings including component grades for Value and Momentum.
Choice Hotels (CHH)
CHH operates in two segments: Hotel Franchising; and Corporate & Other. The company franchises lodging properties and markets cloud-based property management software to non-franchised hoteliers.
Its brands include Comfort Inn, Comfort Suites, Quality, Clarion, Clarion Pointe, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites, Suburban Extended Stay Hotel, WoodSpring Suites, Everhome Suites, Cambria Hotels, and Ascend Hotel Collection. As of last year, the company had an impressive network boasting 7,147 hotels with 597,977 rooms located in 50 states, the District of Columbia, and 40 countries.
Currently, CHH has about 24% market share of the middle-market offering in hotels and another 20% at the budget level. Another feature is its asset-light models as it’s 100% a franchisor. Additionally, its software segment is a long-term, growth engine that other hotel operators become reliant on to run and manage their business. For investors, it offers higher margins and more growth. As this becomes an increasing share of revenues, multiples should expand.
Currently, hotel occupancy rates are about 15% below 2019 levels. As this moves higher, CHH will be a beneficiary. However, there is a lot of regional variability with California seeing 40% lower levels of occupancy, while cities in Florida are down between 2 and 5%. CHH eludes this risk due to the global and diversified nature of its operations.
CHH’s POWR Ratings also reflect this promising outlook. The company has an overall rating of B, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
CHH has a grade of A for Quality which is consistent with it having the highest margins out of any publicly listed hotel. The company’s B grade for Growth is due to Its growing software business, a secular source of growth, while cyclical trends are supportive as well. Click here to see the complete POWR Ratings for CHH.
Travelzoo (TZOO)
TZOO provides travel, entertainment, and local deals from companies worldwide. The company’s publications and products include Travelzoo Website; Travelzoo iPhone and Android apps; Travelzoo Top 20 email newsletter; and Newsflash email alert service.
TZOO’s business was obviously crushed by the pandemic, so it should be considered a high upside way to take advantage of a recovery in travel. Currently, the company may be at an inflection point as evidenced by its recent earnings report which showed a 13.8% increase in net income.
More encouraging is its improvement in operations. Revenue remains about 35% lower from pre-pandemic levels but EPS is already higher. This bodes well for continued earnings expansion in the coming months. Next quarter, analysts are estimating revenue of $18.5 million for Q4 indicates a 48% increase. The EPS estimate of $0.20 is more than triple last year’s $0.06 per share.
TZOO has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. A-rated stocks have posted an average annual performance of 31.1% which compares favorably with the S&P 500’s 8% average annual return.
In terms of component grades, the stock has strong grades across the board including a Value grade of B. This is consistent with its forward P/E of 8.3. Click here if you want to see the rest of TZOO’s component grades including Growth and Momentum.
CHH shares were unchanged in after-hours trading Monday. Year-to-date, CHH has declined -7.45%, versus a -5.83% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
3 Travel Stocks to Buy as Coronavirus Cases Rapidly Decline StockNews.com
