The hotel and leisure industry may have recovered, but these stocks are still struggling to turn a profit
The travel and vacation sector is back in full swing. Now, many investors who bought during the COVID-19 pandemic dip are feeling the excitement of a revived market. However, there are still some travel and leisure stocks to sell. That’s because they weren’t able to take advantage of this resurgence for one reason or another.
In these cases, investors may have invested in these stocks because of their long-term recovery potential. However, as the market moves, stocks that lag behind sometimes need a second look at their profitability. For this article, we’ll identify three travel and leisure stocks to sell based on their cost of income and income.
The reason for these criteria stems from the need for hotels and resorts to remain profitable in order to continue expanding, as expansion is critical to the long-term trajectory of a hospitality brand.
Pebblebrook Hotel Trust (PEB)
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Beginning our analysis of the hotel industry with a broad representative sample, Pebblebrook Hotel Trust (NYSE:PEB) is a real estate investment fund (REIT) which specializes in luxury hotel properties as its investments. On paper, this seems like a phenomenal investment opportunity, as luxury hotels tend to hold their value well over time due to their prime locations and reputation among the wealthy.
However, one of PEB’s main drawbacks has been the location of its hotels. That’s because the company’s holdings are heavily concentrated on the West Coast of the United States, which has seen property taxes, real estate expenses, and the cost of living skyrocket relative to the rest of America. As a result, PEB paid $32.4 million in real estate taxes, personal property taxes, property insurance, and ground rent in the last quarter alone.
While that may not seem like much compared to the company’s $5.7 billion in total assets, it’s more than the $28 million the company lost due to its operating expenses. Unless states like California, Washington, and Oregon start offering property tax cuts soon, PEB will likely continue to struggle to turn a profit, thus limiting its growth potential.
Park Hotels & Resorts (PK)
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Another hotel-focused REIT, Park Hotels and Resorts (NYSE:PK) is much more diversified than the aforementioned PEB. However, PK has also struggled to keep borrowing expenses under control, as its net income declined 12% year-over-year in the first quarter of 2024. This was despite an increase in revenue and operating income and was a result of interest expense associated with hotels in bankruptcy protection that was $6 million higher in the quarter than a year ago.
While this financial problem isn’t a reason to sell the REIT by itself, it does provide insight into a potentially difficult future for PK as it tries to leverage debt against its large asset portfolio. This stems from the fact that in order for PK to continue growing the REIT, it needs to take on more high-interest debt.
While some economists remain hopeful that the Federal Reserve will cut the benchmark interest rate, there have been no cuts announced or scheduled for six months into 2024. So investors may want to avoid PK stock until inflation actually eases, rates fall, and expansion is profitable again.
Ryman Hospitality Properties (RHP)
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Famous for its numerically small but grand portfolio of hotels, Ryman Hospitality Properties (NYSE:Right to Rest) represents a REIT specializing in what may be a vanishing breed of hotels. Its flagship assets in Colorado, Texas, Tennessee and Maryland are well-positioned from a tax perspective, but the cost of operating these megastructures may soon be too high to sustainably grow RHP’s model.
That’s because RHP specializes in owning and investing in some of the largest convention center hotels in the United States. These hotels host thousands of people per night and facilitate meeting spaces of hundreds of thousands of square feet.
While impressive, the rising costs required to maintain such large spaces have reduced RHP’s profitability. As a result, the company reported a 30% decline in net income for the first quarter of 2024. As such, many investors have treated RHP as one of the travel and leisure stocks to sell, with its value down 12% year-to-date.
On the date of publication, the editor in charge did not have (directly or indirectly) any positions in the securities mentioned in this article.
On the date of publication, Viktor Zarev did not have (directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to InvestorPlace.com Publication Guidelines.
