Sorry, friends. Some stocks are better to check out of than to check into.
Every week, I recommend a stock that investors should consider dumping from their portfolios. Every week, I also nominate three stocks to take its place.
Who gets tossed out this week? Come on down, Starwood
I am a fan of Starwood's properties. I once splurged on a St. Regis reservation, and I've stayed at plenty of Sheraton and Westin locations -- enough, in fact, to know that Starwood is a class act in the hospitality industry.
Unfortunately, there are plenty of reasons these days to avoid the sector altogether, and Starwood in particular. Many of the industry's concerns also apply to rivals such as Marriott
Let's go over some of the reasons why:
- Its latest quarter was a disappointment, with earnings from continuing operations falling sharply to $0.56 a share.
- At the time of its report, the company posted initial guidance for the current quarter that was well below Wall Street's expectations.
- Hotel chains aren't necessarily immune to the real estate crunch. A big sandbag in Starwood's report was a 29% dip in vacation ownership and residential sales.
- Some companies will be more affected by the financial-services meltdown than others, and Starwood is definitely going to take a hit. A thick 12.8% slice of its company-owned revenue through the first half of this year came from New York City. What do you think happens to Starwood's shiny, fancy hotels when investment banks are scaling back with fewer corporate guests to entertain?
- How much of Starwood's performance can be attributed to the weaker dollar? With 55% of its revenue generated from overseas locations, I'd say "plenty." What happens now when the dollar is strengthening? Not only will it hurt those currency translations, but it will also dissuade overseas tourists from coming over to stateside Starwood resorts.
- Wall Street is checking out of Starwood. Over the past three months, analyst estimates of next year's profitability have shrunk from $2.90 a share to $2.27.
That last point bears repeating, because it means that Starwood's earnings will be practically flat with this year's showing, and that's with fewer shares outstanding after some aggressive share repurchases.
I would normally applaud buybacks, but Starwood also has more than $4 billion of debt on its balance sheet. That's an onerous bed to sleep under.
As I have every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave ho. Let's go over the three fill-ins.
Home Inns & Hotels
(NASDAQ:HMIN): If you're going to buy into lodging, you may as well go where the growth is. Home Inns runs a rapidly growing chain of value-minded hotels in China. Last quarter was another hot one, with revenue soaring 93% during the quarter. The earnings numbers aren't as kind, but that's what happens when you're scaling quickly with heady expansion -- Home Inns now presides over 366 locations. Yes, Starwood has a presence in the world's most populous nation, too -- it just opened its 100th hotel in Greater China -- but Home Inns is the pure play in the area.
Great Wolf Resorts
(NASDAQ:WOLF): If you're looking for growth in a chain closer to home, check out Great Wolf. The small yet expanding chain of themed resorts with massive indoor waterparks is doing nicely. As a self-contained resort, it's been a logical choice for families this summer who want to get away without refueling their gas tanks every other day. No, the hotels aren't cheap, but they remain popular. The stock has been trending higher since last month's quarterly report. It closed out the second quarter with healthy momentum, as revenue per available room -- or RevPAR -- rose by a sharp 8.1% in June.
(NASDAQ:IILG): It's been just a few weeks since IAC (NASDAQ:IACID)split into five companies, but travel buffs may want to keep an eye on the Interval offspring. Interval runs a popular timeshare-swapping network. The company also runs several travel-related websites. Yes, timeshare sales are weak, but that's one more reason why folks are swapping weeks with one another.
Either way, just make sure you know what you're checking into. Don't buy a stock for its ticker symbol, because Starwood's is deceptive right now. Don't let the bedbugs bite.
Other headlines out of the weekly trash can:
Do you like Rick's substitutions? Would you rather stick it out with the tossed company? Are there other stocks Rick should look at in future editions of this column? Let him have it in the comment box below.
Longtime Fool contributor Rick Munarriz wonders whether bedbugs really do bite. He does not own shares in any of the stocks in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.