Travel Industry Short-Squeeze Opportunities
BALITMORE (Stockpickr) -- There's no question that the global recession put the squeeze on travel stocks. After all, as consumers cut back discretionary spending, lush vacations were one of the first things to get the axe -- and in the corporate world, with budgets shrinking and communications technology moving at breakneck speed, travel stocks have been getting an even smaller portion of the business travel pie.
Now that we're well into 2010, with the airlines, hotels and travel agents starting to see decent cash flow once again amid a recent hike in consumer spending, is it time to go long travel stocks?
Economic fundamentals continue to remain shaky right now, so instead of betting on an entire industry, we're going to look for something more profitable -- a travel stock short-squeeze opportunity.
A short squeeze is the buying frenzy that ensues when a heavily shorted stock starts to look attractive again to investors, causing share price to skyrocket.
One of the best indicators of just how high a short-squeezed stock could go is the short interest ratio, which divides shares short by average daily trading volume in order to get a ballpark estimate of the number of days it would take for short-sellers to cover their positions. The higher the short ratio, the higher the potential profits when the shorts get squeezed.
Each week, Stockpickr creates a portfolio of stocks with high short interest ratios and the catalysts to trigger a squeeze. Here's a look at
, which focus on travel industry stocks.
While
Rosetta Stone
(RST) - Get Report
isn't your traditional travel stock, the language software company's fates are certainly tied to travel. I like the fact that Rosetta Stone's profitability isn't hindered by slashed travel budgets -- language skills are equally valuable on conference calls and video chats. Similarly, the company's deep brand recognition has afforded it a very strong position in consumers' minds, a competitive advantage that's rare for an education company.
To be fair, this isn't first time Rosetta Stone has made my list of potential short squeezes -- the company is up 38.8% since I wrote about it back in January. But with a short interest ratio of 30.08 and positive analyst and investor sentiment for shares, RST is well-positioned for a second squeeze.
The four-star rated
T. Rowe Price New Horizons Fund
(PRNHX) is hoping that a second squeeze is in store. The fund, which owns a 4.54% stake in Rosetta Stone, also holds sizable stakes in
Global Payments
(GPN) - Get Report
and
Panera Bread
(PNRA)
.
The last 12 months have been all about recovery for
Morgans Hotel Group
(MHGC)
. The small-cap hospitality company has seen shares rocket 93.1% the past year following stock performance in 2008 that was truly cringe-worthy. With a current short interest ratio of 15.3, clearly many short-sellers still think that cringe-worthy performance is in store for 2010.
To be sure, there are rough waters ahead for Morgans, which focuses on the high-end hotel segment, with properties scattered across the country. Morgans announced miserable earnings last week, capping off a quarter that left scores of competitors foreclosed on, overleveraged or out of business. But with sentiment so low, it doesn't take much to prompt a pop in share prices -- particularly as travel volumes and room occupancy rates creep back up to somewhat better levels.
One of the Morgans Hotel Group's institutional holders is hedge fund manager
, a $20 billion Chicago-based firm that was founded in 1990 by billionaire trader Kenneth Griffin. Other Citadel holdings include
Apple
(AAPL) - Get Report
and
Bank of America
(BAC) - Get Report
.
Travel booking website
Travelzoo
(TZOO) - Get Report
is up 10% in the last week, a good sign that sentiment is shifting for the company's shares, which currently have a short ratio of 14.6. Travelzoo operates in the highly competitive online vacation business, acting as a virtual travel agent for consumers in a handful of countries. What's most impressive, though, is the fact that the company has managed to turn a profit in four of the last five years despite serious economic headwinds.
Clearly management believes in Travelzo. As the company entered its darkest period in the past 24 months, insiders bought more than 3 million shares, increasing their stake to 66.4%. That confidence is a nice sight to see for the investors who are counting on this stock to head higher, and it means that both management and investors have aligned interests.
Among Travelzoo's institutional owners is
, an asset management firm founded by two Yale professors back in 2001. Among the fund's other quantitatively-driven equity holdings are
Eli Lilly
(LLY) - Get Report
and
Las Vegas Sands
(LVS) - Get Report
.
For the rest of this week's short-squeeze opportunities, including
Allegiant Travel
(ALGT) - Get Report
and
Red Lion Hotels
(RLH) - Get Report
, check out the
Travel Stock Short-Squeeze portfolio
at Stockpickr.And to find short-squeeze plays of your own, be sure to check out the
community for insights and investment ideas.
-- Written by Jonas Elmerraji in Baltimore.
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At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.
