The Contrarian Blog

Marriott Thinks Long-Term on China

by Jim Cunningham 7/12/2012 9:27 AM
Stocks quoted in this article:
Publication: "The Wall Street Journal"
Publication title: "Marriott Makes Room for Chinese Clients"
Publication Date: 7/10/2012
Brief Summary:

Marriott International, Inc. (NYSE:MAR) has a long-term goal in sight, looking to the world's second largest economy for a boost to its already successful hospitality market share. MAR recently announced plans to double its hotels in China to 100 by 2014. According to the article, Marriott also wants to benefit from the "rising wealth and expedited visas" among Chinese citizens, hoping that last year's estimated 1.1 million visitors to the U.S. will triple by 2016.

In order to harness this potential, Marriott has already formed a partnership with Chinese travel site International, Ltd. (ADR) (NASDAQ:CTRP), and has implemented a hospitality program called "Li Yu" (which translates to "serve with courtesy" in Mandarin). The author asserts that MAR is quite capable of handling such endeavors. By employing a "capital recycling" technique to attract "outside investors into projects it has developed," MAR can build new units and use its "free cash" to show its shareholders some gratitude.

Contrarian Takeaway:

MAR has been standout on the charts in 2012, rising more than 30% since the beginning of the year, and leaping roughly 58% from its 2011 bottom of $24.03. Over the past several months, the shares have been attempting to break through the $40 level, which has limited all but two daily settlements since October 2007. In fact, the stock is currently trading within a stone's throw of its more than four-year best of $40.45 -- which was reached in intraday action on May 3.

In light of this impressive price action, the brokerage bunch is mostly upbeat toward the Maryland-based company. While there are 12 "buy" or better endorsements, there are six "holds" and zero "sells." But not everyone on Wall Street is a fan of MAR. Short interest on the equity jumped 13% during the past two reporting periods, and now accounts for 8% of the equity's available float. At MAR's average pace of trading, it would take more than six sessions for all these shorted shares to unwind, which could translate into a contrarian boon for the stock.

The options pits are loaded with bears as well. During the past 10 days, speculators on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 2.37 puts for every call on MAR. This ratio ranks above 80% of all other readings taken during the past year, suggesting that traders on these exchanges have bought bearish bets over bullish at a faster clip than usual during the past couple of weeks.

Plus, the security's Schaeffer's put/call open interest ratio (SOIR) of 2.16 indicates that puts more than double calls among options slated to expire within three months. This ratio rests two percentage points from an annual pessimistic peak, suggesting short-term speculators have rarely been more skeptically aligned toward MAR.

Marriott International unveiled its second-quarter results after the close on Wednesday, July 11, posting in-line earnings. MAR also expressed concern with its some of its international markets, saying that Middle East and Asia experienced softer demand growth, particularly in the luxury segment.

Before the open on July 12, MAR is poised for a 2.8% drop into the $36-$37 region, which has provided a technical backstop for the shares since mid-March. Should this area of support continue to hold, it may provide an opportunity for any of the skeptics to rethink their long-term positions on the stock, and could provide a needed boost for the stock to resume its year-to-date ascent.

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