This Week's Hottest Sector

Newton's law of inertia doesn't always work in the stock market. For example, the S&P 500 index has lost about 7% of its value since Dec. 31 -- yet coal companies like, for example, International Coal (NYSE: ICO) and CONSOL Energy (NYSE: CNX) are in the green.

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Stocks in the same sector have a tendency to move in tandem, regardless of overall market conditions. After all, stocks in the same industry generally derive their revenue from similar sources, and they're similarly affected by news, legislation, or events.

Each week, we'll take a look at the hottest sector over the past five days, according to SmartMoney.com's "Sector Tracker." Then we'll cross-reference the individual equities against investor data on Motley Fool CAPS, the Fool's free investing community. CAPS can give us a better feel for what both individual and institutional investors are saying about these stocks.

A surprising sector
This week's top sector is "Travel & Tourism," up 9.2% over the last five days. This group includes:

Captain Kirk makes good
Priceline.com's great ads featuring William Shatner as the "Priceline Negotiator" may be starting to pay off. The company's fourth-quarter earnings were stellar and may have helped lift the sector over the past week. But Priceline's strength isn't anything new -- since the beginning of 2003, shares are up an astounding 1,170%.

On the other hand, the past few years haven't treated Avis and Hertz shareholders all that well. Both companies are still in the process of adjusting to new corporate structures -- Avis is the old Cendant Corp., and Hertz is a spin-off of Ford (NYSE: F) -- and neither seems to have fully shaken off the chains of their former organizations yet. Avis has been particularly hurt in recent years by the slowdown in the U.S. housing market -- its Budget truck rental segment's revenue has declined nearly 24% since 2005.     

Over on CAPS, investors seem unsure about this industry, giving its components mostly two-star ratings. Some believe the sector will be hurt by the specter of a recession, while others think domestic travel will perk up, thanks in part to the weak dollar and/or the coming tax rebates. The former opinion was recently expressed by player phil27607 on the Expedia page: "[T]he recent January beating [is] out of the way... Everyone seems to think tax rebates are going to be used for electronics and debt payments-- I see a surprising amount of travel coming."

Expedia was indeed beaten down in January, losing 27%, but it's still not a bargain-basement deal with a P/E of 26 and analysts only expecting 12.6% earnings growth over the next five years.

Back in August, CAPS player SlamDunkEarly offered a bearish opinion on the future of online travel over on the Priceline page. "I sense a price growth stall due to the run-up in the past year of the PE and a normalization as in the e-banking sector once the dust settles from the dog fight between [Orbitz Worldwide], Expedia and Priceline for your summer travel."

While SlamDunkEarly was wrong back then about Priceline's price-appreciation potential, Orbitz and Expedia have suffered since last August. And he's also right about increased competition in the sector, but at this point it seems like Priceline's innovative "name your own price" model and its recent announcement of eliminating booking fees appears to have given it a competitive advantage in the group.

As for my opinion on this somewhat broadly defined sector, I'd be cautious with the car rental companies, because both use significant amounts of leverage to maintain and restock their fleets. If interest rates begin to rise, that could put increased pressure on bottom lines. On the other hand, Priceline appears to be lean and mean, with only 300 employees, no long-term debt, no inventory to speak of, and plans to expand its geographic reach. With a trailing P/E of 36, the stock isn't "traditionally" cheap, but high earnings-growth expectations might make it attractive.

What do you think? Will the tax rebate end up funding American travel, or will recession fears keep everyone home? Voice your opinion on Motley Fool CAPS, where more than 83,000 investors are waiting to hear your stock opinions.

For more hot stocks, visit Fired-Up February.