Hotel stocks checking in early?

Why certain hotel stocks could have longer-term momentum beyond the COVID-19 recovery.

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Hotel stocks have recouped most of their pandemic-related decline with help from the rollout of COVID-19 vaccines and pent-up wanderlust. But after this post-lockdown travel boom, will consumers return to being more homebound, especially those who previously traveled for business, or will the big-name chains continue to be full of reservations?

“I think there’s still longer-term momentum behind certain hotel stocks that goes beyond the COVID-related recovery, especially for a few of the larger franchises, which is why I’ve continued to hold them in the fund,” says Will Hilkert, portfolio manager of Fidelity® Select Leisure Portfolio (FDLSX).

Hilkert prefers large hotel chains over independent hotels, as he believes post-pandemic travelers are more likely to turn to recognizable brands that provide consistent service. As a bonus, he says, larger chains also offer loyalty points, which can translate to higher occupancy.

Hilkert adds that the business model of large hotel chains tends to work for most stakeholders, including the franchisees, which he says tend to enjoy higher revenue and profits than they would running independent hotels. Just as important, according to Hilkert, franchisees of the larger hotels have been proactively preparing for the return of travelers by cutting costs and increasing the overall number of available rooms.

As of April 30, the fund counts Marriott International (MAR) and Hilton Worldwide Holdings (HLT) among its biggest overweight positions. Hilkert says he likes these names because he sees room for higher franchise fees, noting both companies have increased the total number of hotel rooms in their respective systems.

“Each of the hotel chains has recovered from the bottom and are reflecting a more normal environment, and I still see potential for longer-term upside as their strong business models continue to grow the number of franchisees and generate lots of free cash flow,” Hilkert says.

Fidelity® Select Leisure Portfolio held securities mentioned in this article as of its most recent holdings disclosure. For specific fund information, including holdings, please click on the fund trading symbol above.

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