Why This Is My Favorite Stock Today

Sometimes being brilliant isn't enough to strike it rich in the market. Sometimes you need to be lucky, too.

Let's start with the "brilliant" part...
About a year ago, I developed a thesis that hotels were systemically cheap. All the evidence was there. It made sense that hotel construction would have boomed during the run-up to the housing crisis and then crashed afterwards. The numbers backed that theory up: The $4.5 billion of large hotel deals in 2002 spiked tenfold to $45 billion in 2007, only to collapse to a scant $2.0 billion in 2009.

Just like speculative home buyers, hotel investors fueled their purchases with excessive debt. When demand for rooms plummeted in the recession, hotel investors were left between a rock and a hard place trying to pay back their massive loans.

The kicker has come in the past year or so: The teaser rates on the hotel loans have started to expire, leaving hotel owners thoroughly overcooked. With little to no cash flow, they are unable to pay off their debt, and the traditional financing market of commercial mortgage-backed securities barely exists these days. Many hotel owners really only have one choice: Sell their hotels -- for whatever they can get.

And that's why I thought hotels would be cheap: owners forced to sell at irrationally low prices.

At the risk of sounding hubristic, this was a great thesis. But how was I to profit from it? I can't just go out and buy a $30 million hotel. And even if I could, what do I know about running a hotel? Nothing.

... and now for the "lucky" part
That's where luck comes in; I stumbled upon a way to profit from cheap hotels just by buying a stock.

You see, I wasn't the only one to figure out that hotels would soon be available at fire-sale prices. Plenty of others, including many industry veterans, did, too. In fact, I found several publicly traded investment vehicles aimed at exploiting these exact opportunities.

Sources: Capital IQ, a division of Standard & Poor's, and company filings.

Then, it was a matter of figuring out which one to buy. Some factors make it easy to narrow down the list. For example, a fund sitting on a lot of cash is better able to take advantage of great deals in the future. But really, the analysis comes down to picking the savviest guy to do your hotel-buying for you.

My favorite stock today
It doesn't take a genius to develop my hotel thesis (after all, I was able to come up with it), but it takes a sharp, well-connected, experienced hotel investor to be able to make the deals to profit from it. Enter Jon Bortz.

Bortz is the CEO of Pebblebrook Hotel Trust, one of the companies on my list above -- and my favorite stock today. After scrutinizing the management of most of the other companies, it became clear that he was my man. After working his way up the ranks at real estate company Jones Lang LaSalle (JLL), he launched LaSalle Hotel Properties (another name on that list), which appreciated rapidly in value as he gobbled up 31 hotels over the course of decade. Bortz was in retirement until the developments in the hotel market compelled him to get back in the game, so he launched Pebblebrook.

I may have stumbled upon an opportunity in hotels, but Bortz's entire career has poised him for this moment. There's no way I'm missing out on the ride.

Rooms are still available at Pebblebrook
In just over a year, Bortz has already closed deals on eight hotels all around the country at incredible prices, and he's just getting started. Even better, the primary catalysts haven't been hit yet. We don't have a full year of financials on any of the hotels yet, so investors unwilling to do their own homework don't have anywhere near an accurate view of how much more Pebblebrook is worth today than when it launched in December 2009. Further, I estimate that Bortz is on track to gain REIT status for Pebblebrook in the next year or so. When that happens, the company will become exempt from federal income taxes, offering further value appreciation overnight. Oh, and did I mention that hotel occupancy rates are already rebounding? Bortz estimates industry revenue per room will bounce back 6% to 8% this year, bringing that much more cash in from the hotels he already owns.

Profiting from special situations
The investment process I just outlined is special situations investing at its finest. It involved developing a unique thesis and then searching for a way to play it. Instead of analyzing a business, I had to select a jockey based on an analysis of his ability to perform a complex task. Most investors shy away from this kind of analysis, but this style of investing can be outstandingly rewarding.

If this style of investing appeals to you, you should consider joining Motley Fool Special Ops, where special situations expert Tom Jacobs and his team spend all their time seeking and analyzing situations like this one. Special Ops is reopening to new members for the first time, and membership is limited, so if you are interested, enter your email address in the box below, and Tom will send you a video with three special situations he likes today along with more information about Motley Fool Special Ops.