The U.S. hotel industry cycle appears to be moderating to historical norms, coming off years of accelerated growth that started in 2010 following the recession.

Apart from softening occupancy levels, negative currency translation and macroeconomic concerns in several emerging economies raise concerns. However, a steady rise in business and leisure travel on the back of an improving economy and positive employment numbers along with strong investor appetite thanks to higher transaction volumes are spreading cheer across the industry.

On the whole, though pockets of geopolitical instability and economic slowdown continue to weigh on sentiment, hoteliers are cautiously optimistic as the Q4 earnings season unwinds.

Q4 so Far

The Zacks categorized Hotels and Motels industry belongs to the broader Consumer Discretionary sector. Per the latest Earnings Trends,  as of Feb 1, 37.1% of the Consumer Discretionary companies in the S&P 500 index have reported their results. Earnings and revenues for these companies have recorded year-over-year growth of 10% and 8.1%, respectively.The beat ratio of 61.5% for both earnings and revenues is also noteworthy.

In fact, overall earnings for the sector in fourth-quarter 2016 are expected to be up 3.8% year over year and revenues are likely to surge 12%.

Thus, with the broader Consumer Discretionary sector poised to come up with flying colors this earnings season, the hotel industry within the sector is also set to gain from the buoyancy.

So, let’s take a look at some companies in the Hotels and Motels space that have the potential to beat earnings in their upcoming Q4 releases. Notwithstanding the headwinds, these stocks are well positioned in today’s market environment, and could see considerable upside riding on the positive trends across the industry. Further, an earnings beat should help these stocks gain investor confidence and pave the way for stock price appreciation.

Making the Right Choice
 
Picking the right stock for your portfolio could appear to be a daunting task given the wide range of companies in the hotel space. One way to confine the list of choices this earnings season is by looking at stocks that have a solid Zacks Rank accompanied by a favorable Earnings ESP.

Earnings ESP is our proprietary methodology for determining which stocks have the best chance to pull a surprise in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

The combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) – and a positive Earnings ESP is usually an indication of an earnings beat. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

4 Stocks to Invest in

With the help of the Zacks Stock Screener we have zeroed-in on four hotel stocks that sport a favorable Zacks Rank and flaunt a positive Earnings ESP. You can see the complete list of today’s Zacks #1 Rank stocks here.

For investors seeking to apply this strategy to their portfolio, below are the four hotel stocks that may stand out this season.

Extended Stay America, Inc. (STAY - Free Report) owns and operates hotels under the core brand, Extended Stay America(R). It is the owner/operator of company-branded hotels in North America. The transformational initiatives undertaken by Extended Stay should continue to drive revenue per available room (RevPAR) as hotels that have already been renovated are witnessing increases in average daily rate (ADR) and occupancy levels.

Zacks Rank #1
Earnings ESP: +7.14%
Trailing four-quarter average earnings surprise: +8.02%
Expected Earnings Release Date: Feb 28

Hyatt Hotels Corporation (H - Free Report) is a leading global hospitality company and operates under a number of leading brands. The company has a significant presence in major hospitality markets across the world. The company has an industry-leading guest loyalty program — Hyatt Gold Passport program — which serves millions of members worldwide.

Zacks Rank #2
Earnings ESP: +4.17%
Trailing four-quarter average earnings surprise: +24.67%
Expected Earnings Release Date: Feb 16

Marriott International Inc. (MAR - Free Report) is the world's largest hotel company following the purchase of Starwood. The acquisition is expected to result in a bigger brand with increased scale and a robust development pipeline. In fact, Marriott’s earnings have beaten the Zacks Consensus Estimate in each of the past 10 quarters given growth in revenues.

Zacks Rank #2
Earnings ESP: +1.21%

Trailing four-quarter average earnings surprise: +2.78%
Expected Earnings Release Date: Feb 15

Wyndham Worldwide Corporation (WYN - Free Report) is a hospitality company engaged in offering individual and business customers a range of hospitality products and services across various accommodation alternatives and price ranges through its premier portfolio of global brands. Notably, the company operates in the lodging, vacation exchange and rentals, and vacation ownership segments of the hospitality industry.

Zacks Rank #2
Earnings ESP: +0.77%
Trailing four-quarter average earnings surprise: +0.98%
Expected Earnings Release Date: Feb 15

To Sum Up

The lodging sector will prove to be a worthy investment proposition in the near to medium term provided the economy continues to shows signs of recovery. This in turn will perk up investor confidence and lead to greater demand, thereby boosting hoteliers’ profitability.

Thus, we believe that keeping an eye on these companies with an earnings beat potential given a solid Zacks Rank and a positive Earnings ESP could be a great idea for investors to tap into the optimism in the space.