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Travelzoo Stock
The Smart Profits Report: Issue #148
Tuesday, October 5, 2004
Travelzoo Stock: My Kingdom for an Option
By Karim Rahemtulla
Investment Director, Mt. Vernon Research
Richard III’s famous lines on the battlefield after he lost his horse (made famous by William Shakespeare in his writings) reminded me of the action in Travelzoo stock that I wrote to you about last Monday.
Here’s what I said a week ago:
- “Travelzoo (Nasdaq: TZOO) is a disaster waiting to happen. If you can, you should short it.
- Problem is, it is an expensive short at $70 per share. And there are NO put options available on TZOO at all, so a short option play isn’t even possible.”
Well, TZOO was poised on the brink of disaster. In fact, Travelzoo plunged $14 per share the other day. As the chart here shows, it had soared to well over $70 before the big crash…
I knew it would likely nosedive, but I did not know when, and I was powerless to act. Why? Because there were no bleeping options available. I could not buy a put if my life depended on it.
And a put option, in this case, was the ONLY way I would have shorted TZOO. Because traders who sold the stock short have been caught in a nightmare, as I’ll explain below… First let’s look at where TZOO is now that it has “corrected” downward so dramatically.
TZOO Has Crashed, But It’s Still Overvalued
Even after falling $14, Travelzoo is monstrously overvalued.
Just look at this recent bit of news, and compare the numbers.
Orbitz, an online travel service, was bought for $1.2 billion by Cendant Corp. That valuation is at about 4 times sales of $280 million.
Travelzoo, by comparison, is selling at a market cap of $1 billion, with sales of - drumroll, please - $30 million.
What’s wrong with this picture? How could TZOO soar so far above a reasonable valuation, then crash so hard, yet still be so overvalued? (And why would I still avoid selling the stock short right now?)
I’ll tell you…
The Rush to Short TZOO Caused the Run-Up
There is a massive short-squeeze going on in Travelzoo shares, and it will end badly for people selling the stock short.
A short-squeeze occurs when those who sold a company’s shares short (hoping they would go down in price) are unable to buy back enough shares quickly enough to cover their positions as the shares move up in price.
Out of desperation, and to limit losses, they buy shares at any price to cover their positions, creating artificially induced demand on a micro-cap stock and sending the shares to the moon.
Think about trying to squeeze a herd of elephants into an elevator - the explosion was waiting to happen, and in this case, it was the share price that exploded.
Lessons to learn from Travelzoo:
- Never short a company with a tight float (very few shares outstanding).
- Look for an option, thereby limiting your losses if your shares move against you.
- Never believe that Wall Street has reformed!
Good trading,
Karim Rahemtulla
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Related Articles:
- Two Ways to Expand Your Thinking - And Your Profits
- Don’t Get Squeezed When Investors Rush to Sell!
- TZOO: A Cautionary Tale About Stocks With No Options
