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Travelzoo's Tug of War Takes Hold

The battle between the bulls and the shorts has turned the stock upside down.

Tired of the dull drudgery of poring over company fundamentals? Take a trip to the upside-down world of Travelzoo. (TZOO) - Get Travelzoo Report.

The New York-based online travel company has been acting exactly as it shouldn't lately. Earlier this month,

it reported a 26-cent-a-share profit for the fourth quarter -- 2 cents below the Street's forecasts -- but it subsequently rallied to a four-month high. Analysts grumbled about how opaque the company's finances are even as they upgraded the stock.

There are different forces at play here, neither of which has much to do with value investing: Namely, it's a battle between investors shorting the stock and others who take a look at technical factors that could force those short-sellers into a painful squeeze.

Until recently, the shorts had the upper hand. According to


, they had sold short nearly 2.5 million shares last month, enough to require 11 days of average trading volume to buy them all back.

But others see a chance to light a fire under the shorts. The result has been a tug of war over the stock that the bulls are winning.

After the disappointing earnings report, Travelzoo shares tumbled as much as 6% the next day. Then it began a slow, steady comeback, rising to close at $35.75 last week. On Monday, the stock closed at $35.85.

All told, Travelzoo is up 25% since the low it posted in January. That's enough to make any short-seller nervous.

Adding strength to Travelzoo's postearnings momentum were two research desks, at First Albany and Stifel Nicolaus (neither of which has an underwriting relationship with Travelzoo), which bumped up their ratings after the disappointing fourth-quarter report.

But here too the news was not exactly what you might expect. Neither analyst had much enthusiasm for Travelzoo itself, either qualifying the improved outlook with underlying reservations or citing more technical and short-term factors for the stock's rising.

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"The company gives no information about its business to allow an investor to make a rational investment decision," wrote Scott Devitt and Marla Block of Stifel Nicolaus in a postearnings research note that lifted the rating to hold from sell.

But, they added, Travelzoo's pre-rally valuation was attractive and it is "a high-margin business in an industry with respectable long-term rates of growth. ... We remain cautious on the company due to management share distribution, limited information and slowing trends in the North America business."

That's not exactly what you'd call pounding the table. Similarly, First Albany cited some technical factors in raising the shares from underperform to strong buy: the high short interest and the possibility of a slowdown in insider selling. Also, the loss of Travelocity as a customer in 2005 will stop dragging down year-over-year revenue figures, making for higher growth rates this year.

But not all analysts saw an opportunity in Travelzoo. Susquehanna lowered its 2007 EPS forecast to $1.25 from its previous estimate of $1.31, citing the company's fourth-quarter miss and the possibility of slow growth in the U.S. and high customer-acquisition costs in Europe. The firm has no underwriting relationship with Travelzoo.

However, hinting at a shared discomfort with Travelzoo's stinginess in sharing information, Susquehanna analyst Marianne Wolk allowed for a short bump in revenue this quarter because of a price increase the company implemented last month.

"While the company will not confirm the size of the increase, we know the 2006 rate change resulted in a 16% increase in revenue per subscriber between

the fourth quarter of 2005 and the first quarter of 2006, and that its rate increases were as high as 40% in some areas this year," Wolk wrote in a note.

"It is possible for the company to surpass our forecast for 5% quarter-on-quarter increases in revenue per subscriber -- a 3% quarter-on-quarter gain in total subscribers

and 8% increase in revenue."

The tone of caution that haunts analysts' comments on Travelzoo is at odds with the growth rates that the company has been seeing: Revenue in the fourth quarter hit $17.7 million, up a respectable 27% from the same quarter a year earlier.

At the same time, operating expenses fell 4% to $10 million from $10.4 million. That pushed up operating profit 118% on the year and helped lift net income 158%.

Those figures alone suggest a bright future for Travelzoo. But they're counterbalanced by other, darker factors: the inadequate guidance on financial performance, a tendency to post earnings at odds with estimates (which have disappointed in four of the last seven quarters), and the sustained attention of short-sellers.

All of that is a reminder of the importance of looking beyond the numbers themselves to gauge a stock's future prospects. Whether the shorts or the bulls will win out seems to be anyone's guess, but trading in Travelzoo should remain an entertaining, if volatile, proposition.