The short interest reported by Nasdaq last Friday in Travelzoo, Inc.(NASDAQ:TZOO) went from 3.77M shares to 3.74M shares on Feb. 15th and Feb. 29th 2012, respectively, an insignificant change in our view.
The negative rebate (cost to borrow shares) that gauges the short selling activity had a very wide range last week. A retail broker's cost to borrow was at a negative 45% with larger availability and one prime broker was at negative 15% with more availability than the previous week. We believe that a new "supply" of shares for shorting has resulted in the recent downward movement in TZOO.
Could Ralph Bartel or another large shareholder, FMR LLC, be lending these scarce shares to encourage short sales in Travelzoo? At first blush, this sounds counter intuitive. But it may just be the "tease to the squeeze". The owner of shares sold short can recall their shares if they are not on margin.
Recently, we approached a well-known corporate activist investor to join our cause in Travelzoo. Although intrigued by the set of facts we presented, he shied away for two reasons: First is the "control shareholder" situation we have explained previously. Second is the "short squeeze" dilemma: will the shorts who get squeezed "cry foul" as they did in the Porsche/VW saga back in 2008? To this concern, we embarked on our mission to report available information and pose possible scenarios in our articles to fully vet the possibility of a squeeze in "broad daylight" thereby rendering a cry for foul play a non issue.
Sometimes short-sellers sell stock in a tough to borrow stock like TZOO just because they can; sudden price drops scare away potential new investors. The lending of shares is not a fully transparent activity. In fact, several days ago, a closely watched case involving this activity at Goldman Sachs (NYSE:GS) and Bank of America (NYSE:BAC) had a turn of events. It involves a paranoid CEO of a heavily shorted, unprofitable company who is claiming foul. That is not the significance of this case. What is significant is the visibility of the inner workings of the "hard to borrow" desks at these institutions.
We are not against aggressive short selling practices. These traders provide liquidity to the marketplace. They can be right or they can be wrong. We actively analyze this practice for anomalies.
We remain long on TZOO and encourage Ralph Bartel to heed our requests. We suggest Mr. Bartel take a hard look at Eddie Lampert's activity at Sears Holdings (NASDAQ:SHLD). Eddie has a much tougher situation on his hands and is making lemonade from lemons. Just imagine what could be done at Travelzoo if Bartel was as enterprising and creative as Eddie.