The hospitality and leisure industry may have rebounded, but these stocks are still struggling to generate profits
The travel and vacation sector is back in full swing. Today, many investors who invested during the COVID-19 pandemic crisis are feeling the excitement of a reinvigorated market. Yet, there are still a few travel and leisure stocks to sell. That’s because they missed out on the recovery 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 evolves, stocks that lag sometimes need to be reexamined for profitability. For this article, we’ll identify three travel and leisure stocks to sell based on cost of revenue and earnings.
The reason for these criteria stems from the need for hotels and resorts to remain profitable in order to continue to grow, as expansion is critical to the long-term trajectory of a hotel brand.
Pebblebrook Hotel Trust (PEB)
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Let’s start our review of the hotel industry with a broad sample, Pebblebrook Hotel Trust (NYSE:PEB) is a real estate investment trust (FPI) which specializes in high-end hotel properties as holdings. On paper, this looks like a phenomenal investment opportunity, as luxury hotels tend to hold their value well over time due to their prime location and reputation among the wealthy.
However, one of PEB’s biggest drawbacks has been the location of its hotels. That’s because the company’s assets are concentrated primarily on the West Coast of the United States, where property taxes, real estate expenses, and the cost of living have skyrocketed relative to the rest of the country. As a result, PEB paid $32.4 million in property taxes, personal property taxes, property insurance, and ground rents in the most recent quarter.
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 operating expenses. Unless states like California, Washington, and Oregon start offering property tax breaks soon, PEB will likely continue to struggle to generate profits, limiting its growth potential.
Park Hotels and Resorts (PK)
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Another hotel-focused REIT, Hotels and Resorts in the Park (NYSE:PK) is much better diversified than the aforementioned PEB. Yet PK also struggled to keep its borrowing expenses in check, with net income down 12% year-over-year for the first quarter of 2024. This came despite an increase in revenue and operating income and was the result of $6 million more in interest expenses associated with hotels in receivership for the quarter than the prior year.
While this financial setback is not in itself a reason to sell the REIT, it does provide a glimpse into a potentially difficult future for PK as it attempts to leverage debt to finance its vast portfolio of assets. This stems from the fact that in order for PK to continue growing the REIT, it must take on more high-interest debt.
While some economists remain optimistic that the Federal Reserve will cut the prime rate, no cut has been announced or expected in the next six months. So investors may want to avoid PK stocks until inflation actually recedes, rates are falling, and the expansion is profitable again.
Ryman Hotel Properties (RHP)
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Famous for its numerically small but grandiose hotel portfolio, Ryman Hotel Properties (NYSE:RHP) is a REIT specializing in what may well be a dying breed of hotel. Its core assets are spread across Colorado, Texas, Tennessee and Maryland and are well positioned from a tax perspective, but the cost of operating these megastructures may soon be too high to allow RHP’s model to continue to grow sustainably.
That’s because RHP specializes in owning and investing in some of the largest convention centers in the United States. These hotels host thousands of people per night and have hundreds of thousands of square feet of meeting space.
While impressive, the rising costs of maintaining such large spaces have reduced RHP’s profitability. As a result, the company reported a 30% reduction in net income for the first quarter of 2024. As a result, many investors have considered RHP as one of the travel and leisure stocks to sell, causing its value to fall 12% year-to-date.
As of the date of publication, the responsible editor did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
As of the date of publication, Viktor Zarev did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to the advice of InvestorPlace.com Publication Guidelines.
