"Extremism In the Defense of Liberty Is No Vice" - or Choice Hotels - CHH
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“Extremism in the defense of liberty is no vice. And moderation in the pursuit of justice is no virtue” is a quote from the great Barry Goldwater in 1962. Barry went on to lose 44 states, but probably got Ronald Reagan elected 16 years later.
I realized many readers might think what I wrote in my last post was rather extreme.
I wrote that I would not even consider adding a stock to my model portfolio if it had not significantly under-performed the market for either the last 1, 5, or 10 years. Many might consider that extreme, to me it was just natural.
Before we had fancy screening packages, my primary source of new ideas was the WSJ new low list. When Compustat became available I kept a list of 300 stocks selling below 1.5x book, and sorted the list on last six months price performance. The worst performing stocks got looked at first.
I was, and still am, looking for companies with problems. or those that have disappointed Wall Street.
But what about those companies that had been doing well. Some might call them “wealth accumulators” or “up and to the right chart” stocks. Or maybe even better, “great companies, selling at average prices”, perhaps more of a Warren Buffett approach in his later years.
As a practical matter, when I started looking through the portfolio of the Victory-Sycamore Opportunity Fund I noticed many companies that had done well, in stock market terms, but were still selling at average valuations. Should I just discard those ideas, or should I at least consider them?
One that caught my eye was Choice Hotels International - CHH - $115.
I have always been more of a Holiday Inn Express (InterContinental - IHG) guy, but I have stayed in many Quality Inn’s in my day, so I am familiar with the product.
The stock has done well. It has provided total returns of over 14% annually for the last ten years, beating the very tough benchmark of the S&P 500. It has under-performed by 10% in the last year, but to me it would have been a toss-out.
Let’s look a little further. What do the the Victory-Sycamore guys see?
CHH is not a cheap stock at 18-20x times earnings. However, if you look at EV/EBITDA, or compare it to Hilton, IHG, and Marriott you might come to the conclusion CHH has an “average” valuation. The balance sheet is excellent, even after a recent acquisition.
What stands out is how well CHH has run its business for the last 10 years. You can look at the CHH presentation and understand how well they have done in terms of RevPar and other industry measures. CHH’s all franchise model limits capital expenditures. It is beyond amazing they have not had more financial problems with their franchisee’s through the pandemic.
It is interesting that Wall Street is quite negative on CHH. There is only 1 buy, 6 holds, and 4 sells. Not many Wall Street guys stay at Quality Inns. To me this is an important positive. I love low expectations and “non-country club” ideas.
Maybe 2022 is a special “catch-up” year for travel not done is 2020 and 2021. However, you can also make the argument that CHH was successful in 2022 despite very high gas prices. Higher mortgage rates might slow new construction of hotel's. Travel stocks are a tough call right now.
The one big holder of CHH is Ron Baron. Baron has always been a little “growthy” for my taste. His biggest holding is Tesla. Baron owns 8.5% of CHH, and it is his 8th largest holding. Mr. Baron does also have a big position in a stock I really like, Red Rock Resorts - RRR.
I will at least add CHH to my “must watch” list. Maybe it is even a better idea than Omnicom or Intel (the least attractive stocks in the Model). That is a debate for another day. Or perhaps, I am just losing my discipline after writing for only two months. Maybe I becoming a VINO, Value Investor in Name Only. At a minimum, I will try not to toss-out ideas like CHH quite so quickly when I do my industry reviews.