The house rules are simple in this weekly column.

  • I bash a stock that I think is heading lower.
  • I offset the sting by recommending three stocks as portfolio replacements.

Who gets tossed out this week? Come on down, Marriott (NYSE: MAR).

Almost done with the tenth chapter
The hotel giant seems to have posted respectable quarterly results last night. Revenue Per Available Room (RevPAR) -- the telltale metric for the hospitality industry -- climbed a robust 9.9%. Revenue inched 8% higher to nearly $2.8 billion, with adjusted earnings growing even faster to land at $0.31 a share -- ahead of the company's guidance.

Don't crank up the penthouse party just yet, though.

The problem with comparing one fiscal second quarter to another is that we were neck-deep in a recession a year ago.

You remember what early 2009 felt like for the travel industry, don't you? Car rental agencies were penny stocks, and most of the air carriers were losing money. Corporate or leisure travel just wasn't happening.

If you want a clearer snapshot, let's compare this year's fiscal second quarter with the same period two years ago.

Bulls might not like that. After all, the company earned more and generated greater revenue than it did last night. RevPAR also tanked 19.6% during last year's second quarter, so we're really just halfway back to where we were two years ago. The valuation clincher here is that Marriott's stock is trading more than 40% higher than it was when it was performing better two years ago.

That's not right.

Marriott's cheery about its future. It now expects to earn as much as $1.13 a share this year. Look harder and I assure you that you can find more attractive stocks trading at 24 times next year's earnings. The company wants to keep growing, with 95,000 new rooms in various phases of development, most of them right here in North America. Really? Do we really need more hotel rooms? Marriott's occupancy was 65% at its company-owned resorts last year. When one of every three rooms is vacant on an average night, I don't see the urgency to grow. 

We had the residential real estate bubble, followed by commercial properties. Marriott may be creating a hotelier bubble, and it just doesn't know it yet.

Simply put, it's just the wrong time to buy into stateside hotel operators. The dollar strengthening against the euro is going to burn Marriott in the near term. Europeans won't be able to afford to come over, and the currency translation on overseas properties won't be kind. 

I'm not alone, since shares of Marriott have the lowest one-star rating in Motley Fool CAPS.

I'm sorry, Marriott. I'm checking out.

Good news
As I do every week, I don't talk down a stock without giving three alternatives I believe will outperform the company getting the heave-ho:

  • Morgans Hotel Group (Nasdaq: MHGC): I'm not entirely avoiding domestic hoteliers. InterContinental's (NYSE: IHG) Holiday Inn is doing neat things in converting some of its pool areas into indoor water parks, emulating the drive-to success of Great Wolf Resorts. Creating standalone destinations make sense in both good and lean economic times. I'm taking a chance on Morgans because the small boutique hotel operator just happens to own three of the toniest resorts in South Beach. Yes, Morgans is losing money and is perhaps even more susceptible to the diminishing euro's impact in wooing European snowbirds. However, its Delano, Shore Club, and Mondrian should be three of the biggest winners of celebrity-studded guests now that the Miami Heat promises to be a hot ticket over the next few years.
  • Choice Hotels (NYSE: CHH): A less speculative investment would be the franchising giant behind value-priced chains including Econo Lodge, Comfort Inn, and Clarion. Choice is profitable, fetching a year ahead earnings multiple in the teens. Its yield of 2.4% -- while less than InterContinental's 3.4% payout -- is considerably more pocket change than Marriott's 0.5% pittance. I also like its Americana appeal. These aren't the fancy convention hotels that may never truly bounce back as Corporate America grows more cost-effective and embraces improving teleconference technology. Choice Hotels is a road trip specialist with a few economical extended stay suite offerings to satisfy corporate travelers. It's the right combination for this side of the tech-awakening recession.
  • 7 Days (NYSE: SVN): A year ago, buying into China's booming travel industry had a few travel portal options, but only one hotelier in Home Inns (Nasdaq: HMIN). A lot has changed now that 7 Days and China Lodging (Nasdaq: HTHT) have gone public in recent months. I like all three, but 7 Days offers the most compelling value. It is trading at 24 times next year's projected earnings, even though it's targeted to grow its top line at a 31% clip this year and 33% come 2011. Home Inns, on the other hand fetches a higher forward earnings multiple of 32 and is expected to grow its revenue at a slower pace over the next two years.

I'm sorry, Marriott. I'm staying elsewhere.