The backdrop is grim. The coronavirus outbreak continues to grow in Europe and North America, with commerce-killing lockdowns becoming standard as a means of reducing the spread. Some hotel stocks have fallen more than 50% since their late-February peak and remain deep in the red despite this week's broad market bounce. Traveling is the last thing on anybody's mind -- or on their agenda -- right now.
What if, however, investors were pricing in a pandemic that wasn't going to hurt the global economy nearly as much as presumed, and is apt to end much sooner than expected?
That's a bet hedge fund manager Bill Ackman has already made. He confirmed the purchase of shares in a beaten-down Hilton Worldwide (NYSE:HLT) some time within the past few days, reversing his concern from a week earlier that the stock was "going to zero" if the U.S. didn't act quickly to quell the COVID-19 contagion.
He may well have the right idea.
Is an end to COVID-19 on the horizon?
It's hurting right now, to be sure. Like rivals Hyatt (NYSE:H) and Marriott (NASDAQ:MAR), Hilton has seen many of its hotels all but forced into lockdowns. Those that are still open are largely unoccupied. Hilton has even gone so far as to help its furloughed employees find other jobs until they're needed again, if they're needed again.
That may well be the case sooner than many investors suspect, however, if former Federal Reserve chairman Ben Bernanke's read on the matter is anywhere near on target. He's likened the coronavirus outbreak to a debilitating snowstorm, rather than a recession-creating impasse. That is, it's overwhelming at the time but could prove to be relatively short-lived. An epidemiologist advising the Centers for Disease Control believes the peak of COVID-related deaths could take shape three weeks from now, though others like ex-FDA chief Scott Gottlieb fear the contagion could continue to grow through the beginning of May.
Even so, the fact that China is now seeing its total cases dwindle and has curtailed some of its quarantine requirements indicates there's a light at the end of the tunnel for other parts of the world trying to curb infections.
Be greedy when others are fearful
It will likely be a slow start, as was the case following tragedies like 9/11, 2002's SARS outbreak, the subprime mortgage meltdown, and the H1N1 outbreak of 2009, just to name a few. But the global economy will pull itself out of this mess. Different industries won't pull themselves out of this mess at the exact same time or the same pace, though. Some surprising names will actually lead the charge.
Yes, hotels are likely among them.
"Hilton, Hyatt, Intercontinental (NYSE:IHG) and Marriott are all poised to receive probably the best results of the hotel chains because they receive so much business travel, and business travel will be the first to recover," Gina Sanchez, CEO of Chantico Global, explained in an interview on Wednesday. "I think that you're going to see a lot of pent-up plans that need to happen at some point soon."
Among those four, Hilton is her favorite. She specifically noted Hilton's strong operating margins and cash flow, as well as a stronger balance sheet.
Pershing's Ackman is also excited about Hilton's upside potential for more basic reasons, saying on Wednesday, "If you can buy Hilton at $60 when it was trading at almost $120, it's going to be a bargain." In other words, he's "betting on the country" now that the country is doing all it can to bring a quick end to the contagion and the subsequent end to its economic fallout.
Don't overthink the timing
Admittedly, it takes more than a little guts to step into any hotel stock right now. There's no near-term clarity, and there's no guarantee Hilton or its peers will spring back to life once COVID-19 is in the rearview mirror. Any analyst's estimates formulated before late February when the outbreak took hold in the western hemisphere are now essentially worthless.
The underlying philosophies that attracted Sanchez and Ackman hold water, however, and the people that made Hilton a top-performing hotel chain before February are still around. The next six months could be dicey, but for investors able to look three years or more down the road at a point in time when even a coronavirus-fueled recession would likely be in the past, Hilton is still a bargain after trading down 35% year to date.