Hotels are crushing it… so why is Wall Street crushing hotel stocks?

Can you guess who will win the Academy Award or the next presidential election? Want to know who will win the Super Bowl?

We all have our own favourite and biased theories, but the winners are often best predicted by what’s commonly referred to as the “wisdom of the crowd.”

Why is our collective wisdom so good?

According to Wikipedia, “A large group’s aggregated answers to questions… has generally been found to be as good as, and often better than, the answer given by any of the individuals within the group… Trial by jury can be understood as wisdom of the crowd, especially when compared to the alternative, trial by a judge, the single expert.”

Things get even more statistically juicy when “the crowd” puts its money where its mouth is… which is why Las Vegas uses crowd behaviour to set odds on sporting events. They know that when lots of folks put lots of money on the line, their collective “wisdom” is often very accurate.

Similarly, if you want to predict the direction of a specific industry or a particular sector of the economy, you should understand the wisdom of the crowd that risks real money on that sector or business.

With this bankable principle is mind, it’s interesting to note Wall Street’s recent wisdom and attitude towards the hotel industry. In 2015, the widely followed Baird/STR index of 41 hotel stocks fell 20.1%. And according to a recent article in Fortune: “here’s the confounding thing: the stocks plummeted even as the industry posted all-time highs for occupancy rates and revenue per available room.”
What’s up with this strange logic?

Is this just a case of savvy institutional investors taking profits off the table?

According to a number of industry analysts, the answer is no. Hotel stocks are being sold off for three fundamental reasons, which should cause everyone in the industry – from hotel owners and asset managers to on-property staff – to sit up and take notice:

1. Concerns over growth: Record-setting performances are hard to sustain year after year. Many Wall Street analysts question the industry’s ability to outperform other sectors. “Hotel stocks finished near the lows of the year (2015) as investors remained concerned about slowing global growth and other macroeconomic headwinds,” said David Loeb, senior hotel research analyst and managing director at Baird.

2. Concerns over competition: Airbnb, HomeAway and continue to grab market share, especially among transient consumers and family travellers. Also, record profits have attracted new players and the pipeline of new product concerns many analysts.

3. Concerns over margins: Costs associated with acquiring new hotel customers through new technology/distribution channels are rising faster than hotel revenue growth itself. Also, some analysts perceive a “race to the bottom” mentality in the fight between OTAs and hotels that has caused the majority of consumers to shift loyalty to the lowest price provider.
Meanwhile… OTA stocks?

Wall Street’s negative attitude towards hotel stocks is further revealed in its outlook on OTA stocks. Apparently, Wall Street doesn’t have the same concerns about the prospects of publicly-traded OTA companies, and for good reason.

Expedia is growing at a healthy pace. In the most recent quarter, the company’s gross bookings increased 40% year-over-year and revenue surged 29% year-over-year, and hotel reservations continue to be the most important contributor to revenues for all large OTA. (Hotels account for 67% of Expedia’s revenue.)

Now what?

Apparently, Wall Street believes the record growth in AOR and RevPAR is winding down. For hotel stocks to shine again and sustain their value over the long term, enlightened hoteliers must focus on the things they can control. Owners and their management teams must find ways to reduce exorbitant customer acquisition costs and build loyalty without cutting down on the quality of their product.

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