Recently I’ve noticed a disconnect in hotel stocks. Although the sector’s leading companies are performing admirably, their stocks fell sharply in 2015 and haven’t yet recovered in 2016. That’s creating a buying opportunity for on-the-ball investors today.

The market has discounted hotel stocks for two main reasons. First, concern about economic growth in China and Europe has made many observers fearful that business travel will decline precipitously in the coming quarters, cutting into hotel companies’ profit margins. Second, the “sharing economy” — whose most famous exemplar, Uber, is transforming the taxi industry — has extended a prominent tendril into the lodging sector. Airbnb and other online home-rental services allow travelers to bypass hotels for homier, and often less expensive, lodgings. Some investors worry that Airbnb will disrupt the hotel business as much as Uber has rewritten the rules for taxis.

#-ad_banner-#Both problems seem overblown. It’s true that China and Europe may not be growing as rapidly as the United States — which itself is hardly breaking economic growth records — but there’s no sign that hotel demand is slackening; instead, the long-term trend is still for growing business and leisure travel as emerging economies continue to grow the global middle class. The aging baby boom population also points to a long-term, growing trend toward more leisure travel by Americans.

As for Airbnb, its rentals doubled in 2015, yet the hotel industry had a banner year. It may be that Airbnb competes mainly with low-cost hotels and motels — not the midrange and upper-end hotels that account for most of the large hotel companies’ earnings. While the trend bears watching, most experts consider hotels and home-rental services to be separate markets.

Meanwhile, the large hotel companies continue to thrive. One of the key metrics that hotel analysts use to measure the health of a hotel business is revenue per available room (RevPAR), which incorporates both sales and occupancy rates. Industry RevPAR has grown robustly in recent years and hit a historic high of around $80 in late 2015. Industrywide, RevPAR is expected to grow about 5.5% in 2016. Analysts say demand for hotel rooms remains strong thanks to continued U.S. economic growth, lower debt levels among companies and consumers and the popularity of newer hotel categories, including hip boutique hotels and resorts favored by younger travelers.

Large hotel companies also continue to benefit from a long-term consolidation trend. Once highly fragmented, the hotel industry worldwide is increasingly dominated by large players that operate under multiple brands serving different price points and customers. As large companies buy up smaller chains, they benefit through efficiencies of scale, cross-marketing opportunities and larger loyalty programs. 

While several large hotel stocks look attractive today, including Marriott (NYSE: MAR) and Hilton (NYSE: HLT), read on for my current favorite.

Hyatt Hotels (NYSE: H) operates 638 properties in 52 countries, primarily in major and midsize cities. Its 11 brands include Park Hyatt, Grand Hyatt and Andaz (luxury); Hyatt Regency and Hyatt (upper upscale); and Hyatt Place and Hyatt House (upscale). The bulk of the company’s focus is on Hyatt Regency (46% of rooms), Hyatt Place (20%) and Hyatt (15%).

Hyatt’s hotel portfolio is well diversified. Properties range in price point from an average of $328 per room for Andaz to $124 for Hyatt Place. About two-thirds of the company’s rooms are in the U.S.; 22% are in the Asia-Pacific region. And about 57% of operating income comes from hotels the company owns or leases and runs itself, with 43% coming from franchised or managed hotels.

Hyatt continues to grow through construction or franchising of new hotels in key cities, especially in Asia. If the number of rooms grows steadily over the next few years while RevPAR grows 3% to 5% per year — a conservative estimate — earnings will rise at a double-digit rate.

Hyatt has a strong balance sheet, with one of the highest credit ratings in the sector. It generates solid cash flow that it uses for strategic investments and to buy back shares. Hyatt recently traded 22% below its 52-week high. Given the company’s steady growth in revenue per room and projecting an expansion in rooms over the next few years, the stock should return to $60 within 12 months and should move well higher in the coming years.

Risks To Consider: Economic turmoil in Asia and Europe could curtail international business travel and harm hotel companies’ profits. 
    
Action To Take: Buy Hyatt below $49.

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