On this episode of Market Foolery, Mac Greer is joined by Motley Fool analysts Ron Gross and Matt Argersinger as they open the mailbag to respond to three listener questions:
- How do companies manage their massive stock buybacks?
- Is it possible that Priceline (NASDAQ:BKNG) and Expedia (NASDAQ:EXPE) are both pursuing TripAdvisor (NASDAQ:TRIP) right now?
- And is taking profits on your big stock winners a good way to rebalance, or just trimming your flowers and watering your weeds?
A full transcript follows the video.
This podcast was recorded on March 8, 2017.
Mac Greer: It's Wednesday, March 8th. Welcome to Market Foolery. I'm Mac Greer. Joining me in studio we have Ron Gross, from Motley Fool Total Income, and Matt Argersinger, from Million Dollar Portfolio. Gentlemen, welcome!
Matt Argersinger: Thanks, Mac!
Ron Gross: How you doing, Mac?
Greer: Guys, I'm doing well, and we're going to try something a little different today. We are going with an all mailbag episode. Fool mailbag, OK?
Gross: OK. I'm in. Like I have a choice.
Greer: You have no choice. We're going to begin with a question about stock buybacks from Tom Smith from Antioch, California. Tom also identifies himself as listener No. 13, and he's a Stock Advisor and Rule Your Retirement member.
Gross: A baker's dozen!
Greer: A baker's dozen. And he's a member, so bump up your game. Tom's question: How are stock buybacks actually done? For example, did Home Depot just put $15 billion in their Schwab account and then put in a limit order? It seems like they have to be careful not to make huge purchases that would shoot their stock price up, too. I'm just curious as to the mechanics of the repurchase process. Ron Gross?
Gross: Nothing says good podcasts like the mechanics of stock buybacks, but I will refer everyone to SEC rule 10b-18. Of course, I'm sure most of us are familiar with it.
Greer: Wow. This is where we lower expectations.
Argersinger: This is getting interesting.
Gross: No, but the bottom line is, yes, you do certainly need a broker. It's not your Schwab account, it's an actual human being who can work and order for you and make trades for you. There's many, many rules associated with stock buybacks, a big one being that you can't be in possession of material nonpublic information, so insider information, which is actually kind of hard, because everything is inside when you work for a company. But it can't be really material, something that you know will affect the stock either way. You only can use one broker in any given day. You can't have many brokers out there putting out different bids for a stock for you, for example. You can't buy more than 25% of the daily volume. You can't be the first trade of the day, you can't trade in the last 30 minutes of the day. Lots and lots of different rules you must follow to keep everything on the up-and-up. Once you get the hang of it, it's not too hard to stay compliant.
Argersinger: I'd say it's fair to say that Home Depot is not opening a discount brokerage account at Charles Schwab. They obviously have a specialist, probably someone at a major brokerage or investment bank that's able to buy in bulk, I would imagine. That's generally how it works.
Greer: Related question here: When are stock buybacks a bullish indicator, and when should investors beware?
Gross: The easiest thing to say is, it's a great use of capital when the stock is undervalued. But how do you judge that? That's the trick. Companies, history has shown, will often buy their stock back at the wrong time, when the stocks are someone overvalued, and that is a terrible use of capital, and it destroys shareholder value. So, you have to be careful. Another reason I hate to see stock buybacks is when the company is trying to offset the dilution caused by issuing options to its employees. I understand why it's done, but you don't want to see that, typically, as a good use of capital. So, if they have a lot of cash, they don't have growth opportunities for all of it, they see their stock as being a great growth opportunity at a good price, then go for it, buy all the stock you can back.
Greer: Our second email comes from Gilly Beaman. Gilly asks, what are the odds that Priceline and Expedia are both calling TripAdvisor at the same time to discuss an acquisition? Matt?
Argersinger: Ah, yeah, Gilly, I think with TripAdvisor at a five-year low, the odds are probably as good as they've ever been right now. And there's been rumors in recent years about an acquisition. I think the best fit is probably Priceline. One, it would really boost Priceline's share of U.S. travel customers. We know booking.com is their big platform. Super popular in Europe. Not so huge here in the U.S. So, it really boosts their marketing potential here in the U.S. TripAdvisor has 350 million unique visitors each month. That's a huge number. Something like almost 400 million reviews. Mac, I know that you're responsible for at least a dozen or so reviews.
Greer: I am. I get their emails, I'm one of their top-rated reviewers, at least in this ZIP code.
Gross: Wow, we're here with royalty.
Greer: That's right.
Argersinger: So, there are a lot of eyeballs that Priceline can gain by buying TripAdvisor. And TripAdvisor has this growing activities business, which is getting some kind of scale. If you think about Priceline as mostly getting people to the destination, while TripAdvisor has things they can actually do when they get to the destination. So, it helps Priceline become more of a one-stop shop OTA. What I'll say though, in reality, I don't think Priceline will ever get the chance, because I think Expedia would be -- if TripAdvisor was compelling enough -- they would actually be the one to make the acquisition. And that's because there's a strong relationship between TripAdvisor and Expedia through Liberty Interactive. And I'll explain that for those who don't know, and you kind of have to bear with me here. Barry Diller and John Malone, longtime friends, occasional business partners. Diller is Expedia's chairman. Liberty Interactive, which is controlled by John Malone, owns 16% of Expedia. Liberty Interactive, in turn, owns a controlling stake in TripAdvisor through its Liberty TripAdvisor tracking stock.
Gross: For those that are still with us --
Argersinger: It goes on. The CEO of Liberty Interactive, Greg Maffei, also happens to be the chairman of TripAdvisor.
Gross: Am I crazy, or wasn't TripAdvisor spun out of Expedia?
Argersinger: It was. It's not controlled by Expedia except to the extent that Liberty Interactive has a stake in Expedia and TripAdvisor.
Greer: At this point, I almost want to go back to the stock buyback discussion. [laughs]
Argersinger: I think, at today's price, an acquisition of TripAdvisor looks compelling to both. But I would say Expedia has, probably, the first dibs. Priceline would have to make a very compelling case and pay a pretty big premium.
Gross: And Priceline is a much bigger company, $85 billion or so, versus Expedia at $18 billion, TripAdvisor now, as Matt said, only a $6 billion company in. So you could get this done with stock, or even low-cost debt if you wanted to. But Priceline is more likely.
Greer: See, I like the Expedia angle because I like Priceline, I love the reviews, I contribute reviews and I post reviews, but I don't buy and I don't transact -- I'm sorry, I just blew that. I love TripAdvisor. I contribute reviews, I read reviews. But the problem for me and TripAdvisor is I don't transact through TripAdvisor. I find the hotel or the place I like, and then I go to Expedia, or I go to the hotel's website. If Expedia buys them, then it's that one-stop shop, I could book my flight on Expedia, I could book my hotel on Expedia, and I can read the reviews.
Argersinger: That's absolutely right, and that's the challenge. TripAdvisor is trying to move to that booking platform where you can do everything there.
Greer: Inertia, I'm not doing it.
Argersinger: [laughs] You're right. So, something like an Expedia acquisition accelerates that, and makes that redundant.
Greer: Our third email comes from Jerry Valanni from Cleveland, Ohio. Jerry writes: Due to the great market over the past year I have a few stocks in my portfolio that have doubled since I bought them. I have been reading up on the strategy of selling half a position when the position doubles. The pro seems to be locking in profits and rebalancing your portfolio. The con seems to be cutting in a half a potential huge winner. I was wondering what your thoughts were on this.
Argersinger: Jerry, I'd say the con is pretty strong for us. We have a term hear at the Fool, and I'm not sure if David Gardner coined it or if he was the first to use it, but it's called trimming your flowers and watering your weeds. Jerry, that sounds a little bit like what you're thinking about doing. In most cases, you actually want to do the exact opposite. You really want to add to your winners and sell your losers, in most cases. But have a healthy biased toward holding on to your winners as long as you can. And, I'd say, especially if you have high conviction in the company, you don't need the cash immediately, and, of course, if you don't see better opportunities elsewhere. If that's all going for you, I would always lean toward holding onto your winners.
Gross: Yeah. I take a little bit more of a value investor slant to that, although I won't completely disagree with Matty. In fact, I won't disagree with a lot of that. But for me, it boils down to two things: Do you think the stock still has market-beating potential? If it doesn't, you probably shouldn't own any of it, if you really want to take a value investor perspective. But if you think it does, then own as much as you like. The second thing is: Can you sleep at night? If a stock is 20% to 40% of your portfolio, is it literally affecting your sleep? If not, maybe it's OK. For me, it's not. I don't typically go over 10%. That's a big number for me. Everyone is different. But for me, the bottom line is, it's not how big of an allocation you have, it's what is the future potential of the stock?
Greer: And guys, Jerry also had some thoughts on how Starbucks could solve its traffic problem. You may have read recently that Starbucks, with the popularity of its mobile ordering system, a lot of in-store traffic. Here's Jerry's idea: After listening to your report that Starbucks' problem is too many orders at morning rush hour, it got me to thinking that maybe they should institute Uber-like surge pricing. During the morning rush, it's $0.10 or $0.20 more, and then cheaper in the afternoon when demand is slow.
Gross: So Jerry got two questions here today?
Greer: It's a question and a comment.
Gross: OK. The business term for what he's talking about, Uber's surge pricing, but it's dynamic pricing. And most pricing is based on demand, and supply, for that matter. But typically, it doesn't get adjusted intra-day like you could see in surge pricing with Uber. But, a great example would be airlines. Airlines fluctuate their prices based on demand and the seat supply all the time. Auto dealerships do it, bars have happy hours where they charge less of a price at the time of day where it's not typically crowded.
Greer: I've heard of that.
Gross: [laughs] There's dynamic pricing all over the place. Disneyland is starting. I read a great article that really summarizes all the ways dynamic pricing is currently being used. The problem is, there's going to be backlash. There's backlash at Uber. People hate the surge pricing. There have been giant periods of time where they've had to phase it out, it still remains, however. If you go to Starbucks and you end up leaving angry that you paid more than you would have if you had waited a half hour, I have a feeling that won't work.
Argersinger: Yeah. I think with quick serve restaurants -- it's not fair to put Starbucks in that category -- but there is a transparency of pricing that's pretty important. So I think if you walked into a Starbucks and you're thinking, "I know what I want, but I don't know how much it's going to cost until I go up to the cashier," that creates an interesting dilemma. But I have to say, I think Jerry is onto something here. I think dynamic pricing, as Ron described really well, that's something that can work for more and more industries. And I think because we are an on-demand consumer now, we're willing to pay more if our time is more important to us in certain cases. So I like the idea.
Gross: I think the stock market is the biggest example of dynamic pricing. The pricing changes literally by the second based on supply and demand. And we seem to accept that. So, I think it could translate elsewhere.
Greer: But, do you think, in our situation, we have a Starbucks and a Dunkin' Donuts right by the office. If Starbucks did something like this and hiked the price of coffee $0.10 to $0.20 in the morning, could they get away with that? I already go to Dunkin', so I'm probably not the best example, but do you think they could get away with that?
Argersinger: You'll start seeing, like with gasoline, they put the prices out front, and it's like, "Oh, it's $0.20 cheaper over here, I'll go here." I'll walk an extra two blocks to save myself $0.20 on a cup of coffee. I don't know.
Gross: The toll roads have it now based on the demand for the express lane. They have the prices change up and down. And for me, it remains to be seen. It sometimes can backfire, and you have the opposite reaction that you want folks to have, ends up happening. So you run into Dunkin' Donuts instead because you're angry at Starbucks? That could be a problem.
Argersinger: It really is fascinating, because it is the value placed on time. I've been in lines many times where I thought, "I will pay an extra $1 if I can get out of here in two minutes as opposed to waiting 15 or 20 minutes." That happens all the time.
Greer: OK guys, we will leave it there. You can always email your questions to firstname.lastname@example.org. Thanks to Jerry, Gilly, and Tom. Matt and Ron, thanks for joining me.
Argersinger: Thank you, Mac!
Gross: All right.
Greer: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening, and we'll see you tomorrow!