Travel stocks are going places

North America’s hospitality industry is growing, and investment experts consider it an attractive sector.

“Lodging companies are telling us that business and leisure travel [volumes] have been good this year,” says Michael Orndorff, vice president and portfolio manager at American Century Investments. He co-manages the Renaissance U.S. Equity Growth Fund.

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“There were concerns about the [impact] of fiscal cliff issues, as well as about sequester [possibly] having a dampening effect about a month ago,” but those concerns have abated, he says, noting lodging companies are now in the sweet spot of their pricing cycles.

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That’s because increased occupancy levels have let hotels raise prices and helped them boost earnings. So they’re benefitting from revenue growth, as well as margin expansion, says Orndorff.

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What’s more, he says new lodging properties aren’t being built at the pace at which demand for them is growing in North America.

Particularly in the U.S., “you had a supply growth of new rooms of about 0.50% last year. It looks like [this will increase to] about 1% in 2013, whereas demand is running at about 2% to 4%.”

And when demand runs ahead of supply, lodging companies can raise rates, which he anticipates they will do this year and into 2014.

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He finds travel an “attractive spot within the consumer space…because of its ability to drive top line growth and margin improvement,” says Orndorff. “Those are typically two characteristics that we like to see in terms of our investments and building our portfolios.”

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He adds, “Lodging stocks historically tend to do well during the early part of the business cycle, and…tend to be more market performers during the mid-part of the cycle. As the pricing dynamics play out—which we’re just on the cusp of seeing—these stocks go through another period of outperformance.”

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