Hotel and lodging stocks could come under pressure in coming sessions after back-to-back downgrades of Choice Hotels International, Inc. (CHH), holding company for Quality Inn, Clarion, Rodeway, Comfort, and eight other regional chains. Market players should watch industry leader Marriott International, Inc. (MAR) in addition to Choice, because the S&P 500 component has lagged its smaller peers in recent months and could enter a major decline this winter.
Bank of America downgraded Choice Hotels stock to "Underperform" from "Neutral" on Tuesday, just one day after a similar ratings cut at Longbow. Longbow analyst Alton Stump summed up growing caution, warning, "We expect RevPAR trends to remain well below pre-COVID levels for at least the next several quarters. However, we remain positive on CHH's long-term fundamentals given the company's predominant leisure demand exposure and non-urban presence."
Wall Street consensus has deteriorated since spring and early summer upgrades. Choice Hotels has now dropped to a "Hold" rating based upon just one "Buy," seven "Hold," and one "Sell" recommendation. A more bullish Marriott outlook hasn't eased weak price action, with a "Moderate Buy" rating constructed from four "Buy," six "Hold," and one "Sell" recommendation. Both issues are trading near median price targets, reflecting indecision that's likely to continue into 2021.
Revenue per available room (RevPAR) is a metric used in the hospitality industry to measure hotel performance. The measurement is calculated by multiplying a hotel's average daily room rate (ADR) by its occupancy rate. RevPAR is also calculated by dividing a hotel's total room revenue by the total number of available rooms in the period being measured.
Choice Hotels Long-Term Chart (2013 – 2020)
Choice Hotels stock completed a round trip into the 2006 high at $36.88 in 2013 and broke out, stalling in the low $60s in 2015. It tested breakout support into the third quarter of 2016 and took off in a trend advance that posted an all-time high at $108.86 in February 2020. The bottom then dropped out in a vertical plunge that relinquished nearly 60% of the stock's value into March. It bounced off that three-year low in multiple waves, reversing at the .786 Fibonacci selloff retracement level about five weeks ago.
Selling pressure has picked up this month, dropping Choice through the 50-day exponential moving average (EMA) and into the 200-day EMA. It's trading right at that critical level in Tuesday's pre-market, setting up an important test of short-term buying interest. Unfortunately, there are few reasons for optimism now that summer is over and the Northern Hemisphere is headed into a winter that could trigger a second pandemic wave.
Marriott Long-Term Chart (2013 – 2020)
The stock returned to the 2007 high at $41.51 in 2013 and broke out, posting a new high at $79.32 in 2015. Buying interest resumed at new support in January 2016, yielding an uptick that hit new highs once again in 2017. This rally posted impressive gains, topping out near $145 at the start of 2018. It sold off into year end and bounced back to the high in December 2019, adding about six points before turning tail in a failed breakout that completed a multi-year double top pattern.
The first quarter's pandemic swoon completed the breakdown, establishing major resistance around the $100 level. Selling pressure eased at a six-year low in March, giving way to a modest bounce that reversed at the confluence of the breakdown level and 50-month EMA in June. This reversal raises the odds that the long-term uptrend has come to an end while exposing an unpleasant trip into the March low.
A double top is an extremely bearish technical reversal pattern that forms after an asset reaches a high price two consecutive times with a moderate decline between the two highs. It is confirmed once the asset's price falls below a support level equal to the low between the two prior highs.
The Bottom Line
Key hotel sector downgrades could translate into lower prices for major industry players this week.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.