Benefits and risks of investing in hospitality stocks
Benefits:
- Growth potential: Hospitality stocks often outperform when the economy is strong because consumers have more disposable income to spend on travel.
- International diversification: Many hospitality companies operate globally, providing shareholders with some exposure to international markets.
- Passive income via dividends: If you're looking for dividend stocks to buy and hold, plenty of hospitality companies pay above-average dividends.
Risks:
- Vulnerable to economic downturns: Since hospitality companies are cyclical businesses, their earnings can plummet during downturns and recessions, when consumers cut back on discretionary spending.
- Low profit margins: Hospitality companies typically face substantial fixed costs, limiting their ability to achieve high margins. For hotels, 10% is a healthy profit margin, and restaurants average 3% to 5%.
- Location dependence: The success of a hospitality business depends partly on its location. If tourism declines, that can have a significant impact on revenue.
Methodology: How these stocks were chosen
The selection criteria for this list started with strong branding, which is a must in the hospitality industry. All the hotels chosen are recognizable names with successful loyalty programs, and the one restaurant chain on the list, Texas Roadhouse, has also set itself apart with its commitment to made-from-scratch food.
Consistent financial performance with steady or growing revenue was another key factor. For hotels, other considerations included occupancy rates, revenue per available room, and development pipelines.
The bottom line
The hospitality sector has its share of quality companies with good growth prospects. These companies have benefited from high travel demand, and many have adapted their businesses to improve margins, such as the hotel companies that now have asset-light franchise models.
However, margins still aren't great in this market sector, and it can be challenging for established brands to meaningfully increase revenue. Even among the top hospitality stocks, most are delivering steady growth rather than massive earnings leaps.
