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Trading Alpha Stocks

Editor's Note: This column, by the authors of the subscription newsletter Stocks Under $10, is a special bonus for readers of RealMoney and TheStreet.com. To receive all the TSC Investment team's picks and pans trading under $10, click here.


Travelzoo (TZOO - Get Report) has been trading in another stratosphere, climbing from $30 to $71 since April on ever-increasing volume.

One of the key metrics we use when selecting stocks for our Stocks Under $10 service is the Alpha Factor. And since we launched in May, readers have frequently been asked why we need an Alpha Factor. This activity in Travelzoo offers a concrete example of the role Alpha Factor can have on stocks, and we wanted to take this opportunity to elucidate our approach to these Alpha stocks.

Let's take a quick look at Travelzoo's business. The company is the largest Internet publisher of sales and specials directly from travel companies, and is driven by advertising sales. It partners with the big airlines, online travel sites, hotels, cruise and car lines to bring consumers together with the company that can best meet its travel needs, and forecasts call for the company to earn roughly $5.3 million this year on sales of about $30 million.

Those numbers aren't spectacular, but they certainly aren't awful in a market in which the consumer is spending on travel and the Web is the most attractive place to shop for travel. Yet the market is treating this marginal travel player like it is the next Microsoft (MSFT - Get Report) or, dare we say, Taser (TASR - Get Report), valuing the stock at 255 times 2004 earnings estimates and 38 times sales. Yahoo! (YHOO - Get Report)), by contrast, a premier Internet player, is trading at 102 times earnings and only 18 times this year's sales estimates.

Enter Alpha

Is the middle man really that valuable? The shorts don't think so. And as they recite in concert that the "fundamentals are so out of line with the stock price," many traders are putting big money behind their belief that this is a home run short candidate, and more than 33% of the float is currently sold short. So the short story is just that -- a plain vanilla, logical call on valuation and sentiment. But the Alpha Factor tells us why this stock has been a supernova and has made it so that every day for the last two weeks we have turned on our terminals and said we would be buyers of the stock no matter where it opened.

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SYM TRADE IT LAST %CHG
MACE $0.44 -0.22%
MSFT $46.90 -1.10%
TZOO $13.06 -0.38%
TASR $31.88 -1.20%
YHOO $43.48 -0.45%

Markets

DOW 18,232.02 -53.72 -0.29%
S&P 500 2,126.06 -4.76 -0.22%
NASDAQ 5,089.3620 -1.4320 -0.03%

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