the struggle for Starwood Hotels: Anbang vs. Marriott

I began following the lodging industry in the early 1980s.  It was an important time.  The US was completely covered with mid-range hotels.  Lodging companies were forced to look for growth in two ways:  segmenting the market (a sure sign of maturity) by adding luxury and no-frills chains; and expanding internationally.

Today, 30+ years later, the international hotel industry is a whole lot more mature. Growth in any form is hard to come by and where the big players are starting to buy each other to achieve market power by being bigger than remaining rivals.

That’s the rationale for Marriott (MAR) bidding for Starwood (HOT), a company about a quarter of its size.

The prize:

–the HOT reservation network

–the HOT loyalty program

–an extensive hotel network

–a skilled staff.

Cost savings from the combination, which MAR now estimates at $250 million, aren’t that big, given a bid for HOT of close to $14 billion.  This is all about obtaining a strong reservation network/loyalty program and achieving gains in relative market share.

a second bidder

Over the past weeks, a second has emerged–Anbang Insurance, a Chinese financial conglomerate.  It had expressed interest in HOT before but had hitherto been unable/unwilling to outline financing details.  Anbang is probably best known in the US for buying the Waldorf Astoria in Manhattan for close to $2 billion last year.

Anbang cash vs. MAR stock

MAR is mostly offering its stock, with a little cash added.  Anbang, in contrast, is offering all cash.

Anbang’s cash is both a weakness and a strength.  The company is publicly listed only in China.  Restrictions on foreign ownership and on foreign trading make its equity completely unattractive to potential holders outside the mainland.  On the other hand, there’s no question about what the offered equity is worth.  Financial theory suggests that MAR’s management should only offer stock if it believes–and the MAR management is very shrewd–is overvalued vs. HOT’s.

value to each bidder

For MAR, HOT is a way to increase its market power in a mature industry.  For Anbang, HOT is a way to make a splash on the international scene, to get a vehicle for expanding/upgrading its hotel interests in China, and possibly taking a step toward stamping itself domestically as a national champion for technology transfer from the rest of the world.

My hunch is that HOT is more valuable to Anbang–a lot more–than to MAR.

industry consequences

A successful MAR bid is a step toward industry consolidation, implying sharper competition among remaining hoteliers and, possibly, somewhat higher prices for you and me when we travel.

Anbang success may mean less opportunity for foreign hotels in China but more competition elsewhere.

 

 

 

trading a stock: what to consider

the cardinal rule

Last week I mentioned that for you and me trading–as opposed to investing–should only be for a small portion of our portfolios.

How so?

Our biggest, perhaps only, advantage over professional investors comes from knowing a few things better than most other people and in being able to adopt a longer time horizon than pros who are worried about quarterly performance.

When we decide to trade, we give up those advantages.  The main reasons for doing so are that we’re currently in a period of unusually high volatility and because we can probably find one or two stocks to study to the point that we know the short-term movement patterns as well as anyone else.  Having something to do to fill up the day is a far distant third reason to trade.

finding a stock to trade

fundamentals should be at least stable

Our idea is going to be to buy and a low point, sell at a high point and then repeat.  We don’t want to be involved with a stock where the business of the underlying company is deteriorating, because this diminishes the chances of the stock ever going up.

trading range

When we find a candidate, the first thing to do is to get a chart of the stock price over the past several years.  On it, make one line that goes through all the short-term high points, and a second that goes through all the lows.  This will typically form what technicians call a channel , within which the stock will trade and whose upper and lower walls will mark turning points between which the stock will bounce.  The move from lower wall to higher wall and back could take a month or it could take six.  The assumption we make, as the basis for our trading, is that this pattern will recur.  Buy at the bottom, sell at the top, and repeat.

Channels can either consist of two horizontal lines or have an upward or a downward slope.  In my experience, the chances of a breakout to the downside are much higher if the channel has a downward slope.  Avoid downward sloping channels.

ranges don’t last forever…

…although a given stock can trade in a well-defined channel for years and years.  So we have to be alert for a breakout from the channel, either to the upside or the downside.  Upside breakouts are little more than an eventual fact of life for traders, and a key reason not to try to trade the entire position in a core holding.  Downside breakdowns are a greater practical concern.  Finding companies to trade that have strong fundamentals and are in uptrending channels is our best defense against this.

 make a plan in advance:  (my) rule of thirds…

If we’re going to try to trade a stock that has shown a past pattern of trading between 10 and 20, there’s no need to buy/sell at precisely the presumed high/low and all at once.  My personal preference would be to buy a third of my intended position at 12, another third at 11 and the final third at 10 (assuming the stock cooperates).  I would plan to sell a third each at 18, 19 and 20.

…and stick to it

We all tend to get caught up in the moment.  At least I do. Let’s say the plan is buy at 12, 11 and 10–and sell at 18, 19, 20.  If the stock drops to 9, don’t buy more.  If the stock gets to 19.5, don’t decide to hold out for 25.  Sell at 20.

trading is not for everyone

I find it entertaining.  But it can be time-consuming.  Some people have a knack for it, some don’t.  Remember, too, that trading can be a bit like bowling or golf.  Other peoples’ public success stories are most likely not true and complete.

 

 

 

 

trading your own portfolio: general outline

preliminaries

size

Let’s assume I have a $100,000 portfolio.  I probably have a core of 85% in index-like products of some sort, with the remainder in, say, five active positions.  Each would be 3% of the portfolio, or about $3,000 each.   I would probably try to trade one of them.  In other words, this kind of trading should be a side show in investment strategy, not the main event.

trading commissions

If this is the amount I want to trade, I can’t possibly do this in a traditional brokerage arrangement.  I’ll be destroyed by commissions.

what can’t be traded easily

I may not be able to do this with some mutual funds or ETFs, which may limit the frequency with which I can buy or sell shares.  They may simply not honor trade requests, or may put them through and then impose financial penalties.  Either way is unpleasant.  So individual stocks are best.

liquidity

If the portfolio is $1 million, then the amount I’d be trading, using the arithmetic above, is $30,000.  If it’s $10 million, it’s $300,000.  At this last level, there may be some thinly traded stocks where getting in and out immediately will be a problem.  My preference would be to avoid stocks like that.  So the universe I would be willing to trade in narrows as the portfolio becomes larger.

taxable or IRA/401k?

Successful trading will likely produce short-term gains.  Arguably, they’d be best recognized in a non-tax or tax-deferred account.  On the other hand, there’s the tradeoff that doing so loses the benefit of taking a tax loss if a trade ends in tears.

Personally, what little trading I do is in a taxable account.  For me, this reinforces the idea that trading is not a structural pillar of my investing but more like embroidery around the edges.

More tomorrow.

 

trade your portfolio? …why not?

trading your portfolio

Trading your portfolio can be a couple of things.  It can mean finding one or more stocks you own for the long term but that have periodic ups and downs.  You try to add to positions when they’re down, with the intention of selling the extra when prices are unusually high.  Or you can take a stock that is unusually volatile that you have little long-term interest in and try to buy at low points and sell at high.

Professional portfolio managers, with the possible exception of hedge fund managers whose main (only?) skill is trading, usually don’t trade their portfolios.

professionals don’t

How so?

–For a professional manager with, say, a $5 billion portfolio containing fifty positions, average position size is going to be $100 million.  There may not be enough daily trading volume in any given stock for short-term buying and selling to make a meaningful difference in overall results.

–I used to think that truly excellent trading, which I had through the trading room at my last job, could add 100 basis points to my portfolio return in a year.  Certainly no more, maybe less.  My job, on the other hand, was to try to add 300 basis points to the return on the index through good selection of sectors and individual stocks.  It made no sense for me to take my mind off 300 basis points–and risk losing them–when the highest payoff I might get for spending a lot of time on trading would be 1/3 of that.

–The skills are different.

–Pension clients actively dislike portfolio managers (again ex the hedge funds they irrationally adore) who trade a lot.  They monitor turnover ratios, that is, the annual dollar value of buying and selling activity as a percentage of total assets.  They simply won’t consider a new manager whose turnover is much higher than the average, not matter what the long-term record.  So successful trading is a good way to drive clients away.

 

you and me

None of that affects you and me, though.  And the stock market has been crazily volatile in recent times.  Why not try to take advantage of battling trading computers that are creating strange ups and downs?

No, this is not for everyone.  There are risks.  Still…

More tomorrow.