First-quarter 2017 ushered in good news for the U.S. hotel industry with solid demand supporting modest growth in both occupancy and average daily rate (ADR). Revenue per available room (RevPAR) also increased 3.4%.

Rising employment, higher real income, and increased household net worth has reinforced consumer confidence and sentiment. This has resulted in a steady rise in business and leisure travel, and higher transaction volumes, which most likely continued in the second quarter.

Negative sentiments related to traveling to and from the U.S., a decline in international inbound travel, and a strengthening dollar are acting as the major spoilers for the domestic hotel industry. Yet, it will be reasonable to take a favorable view of the lodging industry’s supply-demand fundamentals given the improving U.S. and global economic outlook.

Particularly, confident consumers bode well for hotels despite the surge of new inventory in the marketplace. In fact, the Consumer Confidence Index climbed from May’s reading of 117.6 to 118.9 in June. We anticipate this positive sentiment to translate into higher consumer spending, which, in turn, should drive growth.

Moreover, hoteliers are trying every trick in the book to adapt to changing consumer expectations and entice them with their diverse portfolio of travel offerings.

Thus, though industry-wide headwinds continue to weigh on investor sentiment, hotel companies have good reasons to remain optimistic about this earnings season.

What to Expect?

The Zacks categorized Hotels and Motels industry belongs to the broader Consumer Discretionary sector. Per the latest Earnings Trends, as of Jul 12, a mere 5.7% 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 14% and 5.6%, respectively. In fact, they’re unblemished with earnings as well as revenue beat ratio of 100%.

However, overall earnings for the sector in second-quarter 2017 are expected to be down 1.6% year over year while revenues are likely to surge 7.8%.

While the readings suggest that the overall sector might not fare too well in this earnings season, there are still a few major hotel companies within the sector that are expected to reflect resilience. Therefore, this is the right time for you to select hotel stocks that have the potential to beat earnings in their upcoming second-quarter releases.

In spite of the headwinds, these stocks are well positioned in today’s market environment. We believe, earnings beat should further help these stocks gain investor confidence, thereby paving the way for stock price appreciation.

How to Screen the Outperformers?

Choosing the most rewarding stocks within the hotel industry might be difficult unless one knows the trick to shortlist. One way to do it is by picking stocks that have the combination of a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), and a positive Earnings ESP.  You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

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

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

3 Prominent Picks

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

Our first choice is Wyndham Worldwide Corporation . This hospitality company is 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.

Wyndham posted a 2.70% positive earnings surprise in the previous quarter. Moreover, the company’s earnings surpassed the Zacks Consensus Estimate in each of the last four quarters at an average of 2.64%.

For the upcoming release, the company has an Earnings ESP of +0.67% and a Zacks Rank #3. The Zacks Consensus Estimate for the quarter’s earnings is pegged at $1.50.

The company is set to report second-quarter results on Aug 3 before the opening bell.

Next is Marriott Vacations Worldwide Corporation (VAC Quick QuoteVAC - Free Report) , a developer, marketer, seller and manager of vacation ownership resorts and vacation club, destination club and exchange programs, principally under the Marriott and Ritz-Carlton brands and trademarks.

Last quarter, the company posted a positive earnings surprise of 3.39%. However, the trailing four-quarter average earnings surprise is a negative 1.95%.

For the upcoming release, Marriott Vacations has a Zacks Rank #3 along with an Earnings ESP +3.94%. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for the to-be-reported quarter’s earnings is pegged at $1.27.

The company is slated to report second-quarter 2017 results on Aug 3 before the market opens.

Finally, we pick Hilton Grand Vacations Inc. (HGV Quick QuoteHGV - Free Report) — a timeshare company that develops, markets, sells, and manages timeshare resorts. It is a division of Hilton Worldwide Holdings Inc. (HLT Quick QuoteHLT - Free Report) .

Last quarter, the company posted a 34.21% positive earnings surprise. It looks poised to beat expectations in the second quarter as well. The company carries a Zacks Rank #3 and has an Earnings ESP of +2.22%. The Zacks Consensus Estimate for the quarter’s earnings is pegged at 45 cents.

Hilton Grand Vacations is expected to report second-quarter results on Aug 2, after market close.

Bottom Line

Perked up investor confidence is sure to lead to greater demand, thereby boosting hoteliers’ profitability. We thus believe that a sneak peek at some possible outperformers in the hotel space backed by a favorable Zacks Rank, positive earnings ESP and strong fundamentals could be a great idea for investors to gain from this earnings season.

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