Shares of hotels and motels have been shunned by investors all year. So why is Red Roof Inns (RRI) on the upswing? The largest U.S.-owned economy chain, Red Roof saw its stock sag--from 17 in late August to 13 by Sept. 4--along with hotels in general. But Red Roof has climbed back to 17 lately. There's buyout talk. ''The company is being informally shopped,'' says one industry executive.

Red Roof was bought by a group led by Morgan Stanley in the early 1990s and was taken public in 1996. The group still holds a 66% stake: Morgan Stanley Real Estate Fund owns 45.9%, and Morgan Stanley Real Estate Investment Management owns 19.7%. Another group, Longleaf Partners, holds 7.1%.

''Morgan Stanley isn't in the hotel business, and Red Roof is an asset it should not logically own for the long term,'' says the hotel executive. He thinks the replacement value of Red Roof is about $30 a share.

Bailey Dalton, an analyst at CIBC Oppenheimer, agrees. But she points out that the estimate does not include the potential of Red Roof's widely recognized but underfranchised brand name. She argues that such an asset should add a premium to the stock price. Red Roof plans to open 20 franchises in 1998 and 50 per year thereafter with the ultimate goal of 1,000 inns, notes the analyst.