The World-Class Stock I Could Own Forever


Let me start with a simple confession -- I love luxury hotels.

There's simply nothing like a great living space to make you feel like a million dollars when on vacation or business.

I can still remember vividly the thrill I had when I last got a luxury room a few years ago at the Ritz-Carlton hotel. That time when the bellboy led me down the hall and swiped the special card for the doors that led into the coveted presidential suite.

The room didn't disappoint. The wall-to-wall marble and gold trim were immediately eye-catching. The furniture was immaculate and perfectly laid out. The kitchen and bar were fully stocked.

It was paradise with a card key.

I enjoyed those days immensely. In fact, I didn't leave the room much -- instead having people come up for meetings in the lavish sitting area. I remember one incident where a guest asked if he could smoke in the room -- and upon phoning the front desk, I was told, "Sir, you can do whatever you like."

This feeling is the power of the luxury brand. It's not hard to see why people globally pay billions for it, and why the companies that offer it enjoy hefty profit margins and solid growth.

And when it comes to high-end products, hotel rooms -- and the companies behind them -- may be the cream of the crop.

It's for that reason that the high-end hotel business fits very well with the list of investing virtues I hold very dear in my premium newsletter, Top 10 Stocks .

Here are some of the key points from my checklist...

1. The world's greatest businesses sell their products at premium prices.
When it comes down to it, a hotel room is just a few hundred square feet of empty space. And yet, luxury-branded operators are able to sell the same space for hundreds or thousands of dollars more per night than their competitors.

2. The world's greatest businesses have a global reach and appeal for their product.
Whether you're from Dublin, Dubai or Dakar, luxury hotels appeal to a desire common to all humans -- the wish to be special. That's a selling point that transcends national and cultural borders. And this results in a near-global market for these products.

3. The world's greatest businesses dominate their competition.
The thing about luxury is -- it's nearly impossible to create quickly. Sure, you can deck out a room in fancy marble and the latest chic furniture, but when it comes to true luxury -- and the status it carries with it -- there's a strong element of brand recognition.

You're going to get more jealous glances at a cocktail party if you just got back from a stay at the Four Seasons rather than a trendy new start up -- no matter how good the latter might be.

While these are great things to have in an investment, there's one of my rules for great businesses where asset-intensive companies like hotel chains tend to suffer.

That's free cash flow.

4. The world's greatest businesses generate enormous cash flow with low capital spending requirements.
Most hotel chains have a large portfolio of high-traffic facilities that need constant maintenance -- meaning that sustaining capital expenses for upkeep can take up good chunk of operating profits. This reduces free cash flow that can be paid to investors in the form of dividends or share buybacks.

But it's important to note that I said most hotel chains... because I've found one industry-leading firm that bucks this trend -- especially against the substantial revenues and cash flow it makes from its unparalleled portfolio of global properties.

The company I'm talking about is Starwood Hotels & Resorts (NYSE: HOT ) -- a management company that holds some of the world's more recognizable hotel brands --including Westin, Sheraton, W., and St. Regis.

Putting its portfolio together, Starwood is one of the largest luxury hoteliers in the world -- with 1,175 properties spanning nearly 100 countries.

At last check, Starwood was able to charge an average of as much at $315 for a night's stay at some of the chain brands it operates.

That's a premium price, suggesting this is a company that knows how to create luxury -- the kind guests will pay for .

But what really makes the company unique -- and a great investment -- is its business model.

Since 2000, the firm has been transitioning from being an owner of hotels to an operator.

That's included the divestment of 128 properties, as well as the conversion of the majority of the firm's properties to a managerial relationship where they provide branding and operational expertise, but don't actually own the property.

And when Starwood has acquired properties and applied its magic to them, they sell them for premium amounts -- enough that the firm nearly completely covers its maintenance expenses.

During 2013, nearly 75% of the firm's revenues -- over $4 billion -- came from property management and other services.

That shows just how good Starwood is at its business.

In other words, not only are customers willing to pay top dollar for the luxury hotel rooms, but hotel owners globally are willing to pony up billions just to use the company's name , as well as their expertise in creating top-dollar guest experiences.

Put it all together, and it's not hard to see how this high-margin, luxury-brand stock has crushed the market over the past five years -- beating the S&P by more than 112 percentage points.

By combining its strong cash flows with its ultra-low net capital spending, Starwood can return a huge cut of its profits to shareholders... In fact, last year alone, the hotel firm shelled out $572 million to shareholders in dividends and share buybacks .

And based on the $426 million in operating cash flow Starwood has made through the first two quarters of this year, I expect the company to have close to another billion-dollar year in 2014. That should mean lots of available cash -- which I expect will go into continued share buybacks, debt retirement and, of course, dividends.

In fact, the company has been so successful this year, the board of directors has already approved a special dividend of $0.65 per share -- as well as a new $1.1 billion share repurchase program.

With all these advantages -- and a time-tested business strategy -- I'm happy to buy and hold Starwood as it continues adding value globally, and reaping strong profits.

Companies like Starwood Hotels that dominate their market and command large profit margins are part of a special group of securities I call "Forever Stocks" -- stocks that are so dependable, you could buy them today and potentially collect returns from them for years or even decades.

P.S. -- In my latest report, The 10 Best Stocks To Hold Forever , I've detailed an investment that lets you own and collect profits from dozens of infrastructure monopolies across the entire world, as it pays you a dividend yield of 4.9%. Another company dominates nearly 90% of its primary market and has turned every $20 invested in 1972 into $41,000 today. This is one of the most epic stock-market runs in history -- and it happened despite the '87 crash, the "Dot-com" bubble, and the Great Recession. To get all the details on these companies, and several names and ticker symbols of more Forever Stocks , watch this free presentation.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Investing Ideas , Stocks

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