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Bill Ackman Sees Opportunity in the Beaten-Down Hospitality Sector

Activist investor Bill Ackman (Trades, Portfolio) has never been afraid to speak his mind, and yesterday was no different. He appeared on CNBC to discuss what he thinks the government needs to do to combat the current health crisis, voicing some strong opinions about the hospitality sector.

Time to buy a bargain?

Ackman believes an extended "spring break" for all Americans, apart from providers of essential services, is what is needed to get the crisis over with. He also thinks the federal government should pay wages during the shutdown. There are some sectors that Ackman thinks will be harder hit than others; for instance, the hospitality sector:

"If you go from 80% occupancy to 0, you're toast - you go down 50% you're toast as well, but you're certainly toast at 0. Take a look at Hilton stock - it's the canary in the coalmine. This is an incredibly well-capitalised, dominant global company [down 53% since February 20th] that actually doesn't own many hotels, it just collects royalties".

Ackman's Pershing Square is a major investor in Hilton Worldwide Holdings Inc. (NYSE:HLT), so he is speaking here as a concerned owner, as well as as a market commentator. The big problem for every player in the hospitality industry is that it is very difficult to survive without a source of revenue for extended periods of time, especially if you are highly levered and cash poor.

Some of the biggest stock declines have been in the restaurant business: over the last three weeks, IHOP parent Dine Brands (NYSE:DIN) is down 82%, Red Robin (NASDAQ:RRGB) has declined 85%, Dave & Busters (NASDAQ:PLAY) is down 89%, Brinker International (NYSE:EAT) is down 82% and Bloomin' Brands (NASDAQ:BLMN) has tumbled 75%. The problem is that some of these businesses have poor balance sheets, which further compounds the problem of weak cash flow.

That said, Ackman does have some optimism. In fact, he is buying Hilton stock aggressively, as well as other hotels and Starbucks (NASDAQ:SBUX). He is making such an aggressive bet because he believes that governments will ultimately be successful in containing the outbreak, and consequently, this is a great buying opportunity for investors willing to handle some pain in the short term. After all, that is what value investing is all about - focusing on the long term and using market panics to get great deals. You just need to sort the wheat from the chaff and figure out which companies will succeed and which ones have been taken down by the volatility of the overall market.

Disclosure: The author owns no stocks mentioned.

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This article first appeared on GuruFocus.