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    MARKET EDGES

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Goldman upgraded Starwood to Buy after the close yesterday.  It doesn't look like a buy to me but that is fine.  At the same time, the firm upped its price target a whopping 145% to $27.  So fundamentals must be improving, right?  Cost of capital must be falling, no?  The hotel transaction market is opening?  Asset values increasing?  Try none of the above. 

Instead, the upgrade is predicated on minimal supply growth and easier 2H comps.  Yet, these "catalysts" were in place 2 ½ months ago when the stock was under $10.  Now that the stock is up 145%, the supply and easy comparison drivers are suddenly important?  This smells like a sentiment upgrade to me, i.e. stock is up big, momentum guys are buying, and I want to jump on board.  Getting in front of the time when RevPAR improves (given as the catalyst for stock appreciation) is dubious when:  a) we are a long way from that happening, b) stocks have already ripped.

Is this the kind of research institutional investors pay the sell side for?  The fact is that the stock has made a big move, along with everything else in my space, based in part on the "less bad" thesis.  The 2nd derivative thesis can be an effective one.  The problem for HOT and lodging in general is that business hasn't gotten less bad like other sectors we follow.  Occupancy is still declining, forget about rate.  There is very good reason to believe 2010 will be worse than 2009 due to the timing of 2010 corporate rate negotiations occurring this year (when the buyer has all the power), the long tail of the group and convention business, and the deep cost cuts already implemented in 2009.

Besides, a recovery thesis works better when stocks are on their back, which is clearly not the case here.  Price targets based on 11-12x EV/EBITDA look very aggressive, especially when based on 2011 EBITDA.  Can you say momentum justification?  As we've written about, historical EV/EBITDA multiples are less relevant when cost of capital is escalating.  Why is an 11.5x multiple appropriate when the cost of borrowing is 300-500bps higher than the 2004-2008 period and there is so much more risk?