Hotel Stocks Gain Amid Signals Their Shares May Be Undervalued

Depressed for much of the year, hotel stocks staged a rally Monday on Wall Street amid indications that their shares may be undervalued and the talk of a recession overblown.

Shares of Phoenix-based Starwood Hotels & Resorts rose $2.50, or 11.4%, to close at $24.50 in trading of 1.703 million shares on the New York Stock Exchange, compared with its three-month daily average of 1.05 million shares.

Patriot American Hospitality Inc., a Dallas-based real estate investment trust that owns and leases hotels, rose $1.31, or 15%, to close at $10 in NYSE trading of 2.207 million shares, more than twice its three-month daily average.

Even Los Angeles-based Hilton Hotels Corp. closed Monday at $18.88, up $1.69, or 9.8%, despite relatively flat trading on the NYSE of 1.483 million shares.

Hotel stocks had fallen this year on concern that a slower U.S. economy and overbuilding would put a strain on profits. However, prices started edging up at the end of last week, spurred by optimism in the wake of the Federal Reserve Board’s interest rate cuts.

Bob Smith, a fund manager who runs the T. Rowe Price Growth Stock fund portfolio, said in Barron’s on Monday that Starwood’s price reflects the expectation of a recession.

Smith said he thinks that concern is overstated, and the economy will make a soft landing in the next six to 12 months. If that happens, a luxury hotel stock would be one of the first to take off.

But, as Green Street Advisors lodging analyst John Arabia pointed out, these stocks have a long way to go to reach their 52-week highs. Starwood topped out at $61.50 last year, more than double its current price. Likewise, Hilton’s shares are still far from their July high of $35.81.

“These stocks still look very cheap,” Arabia said.

*

Bloomberg News contributed to this report.