2 Stocks We're Watching to Start 2019

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Each week, Industry Focus: Financials host Jason Moser and Fool.com contributor Matt Frankel, CFP, both discuss a stock that has caught their attention. This week, Matt discusses why 8.2%-yielding hotel REIT Apple Hospitality REIT (APLE 0.63%) looks too cheap to ignore, while Jason has his sights set on mortgage software company Ellie Mae (ELLI). In this video, you'll find out why.

A full transcript follows the video.

This video was recorded on Jan. 7, 2019.

Jason Moser: Matt, let's clear this week out here and wrap it all up with One to Watch. I'm going to let you go ahead and start here. What's your One to Watch for the coming week?

Matt Frankel: I'm going to name one of my REITs. I don't personally own this one yet, but it's jumped to the top of my watch list. Over the past couple of months, hotel stocks have really gotten beaten down. Unlike a lot of commercial properties, hotels are very recession-prone industry. Since the whole reason that the market's done what it has is because of fears of a global slowdown or recession, hotel stocks have been completely annihilated.

I want to recommend one called Apple Hospitality REIT, ticker APLE. They invest in mid-market hotels. Think Homewood Suites, Courtyard by Marriott are some of their big brands in their portfolio. These tend to hold up better than most during recessions. They get a lot of the business crowd, which is less sensitive to economic slowdowns. They also tend to get a trickle-down effect -- when people who would normally go to a higher-end hotel need to cut back, they go to these ones.

Right now, because of how badly these have been beaten down. this one is yielding 8.2%. It's well covered by the company's earnings. Even if it takes a hit, that dividend's well covered. That's one that I'm watching right now. Even if it takes a little while for these to recover until the next recession comes and goes, or whatever happens, you're getting paid really, really well to wait. That's one that's on the top of my list. Now that I realize I have 56% of my portfolio in REITs and financials, I may have to rethink it. [laughs] But that's definitely one that I'm really tempted to buy right now.

Moser: [laughs] That's good. I'm with you. I'm going to go a little bit real-estate-oriented as well. A little bit different, though. This is partly a tech play. It's Ellie Mae, ticker ELLI. Ellie Mae is the mortgage software provider we've spoken about before.

This is a really good business that's caught in a really tricky time right now. The sentiment for buying homes is low. Some complaints about inventory being somewhat tight, prices being a little bit tough, and interest rates starting to move upward. Really, Ellie Mae counts on that volume, either in the form of purchases or refinances. They're pinned very much to the housing market. The stock has taken a big hit over the past year because of management ratcheting guidance back a little bit based on the housing market and some questionable economic conditions for home buying in the coming quarters.

I think this is the point in time where you need to be looking at a business like this. It's a good business. It's profitable. It has strong cash flow, competent management. It's trading at around 22 times free cash flow today. Historically, that's a pretty good deal for what we consider a darn good business.

I will say, I do own shares of Ellie Mae myself and remain a happy shareholder. I think this is a good opportunity to be looking at this stock if you don't own it. The housing market will come back. It ebbs and flows. Hey, if we have a recession that hits in the next year or two, you never know, if we do see something like that, this business could certainly get cheaper. But, a good business, and one I think listeners should keep on their radar.