Travelzoo Jumped: What You Need to Know

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: On Wednesday last week, Mr. Market made a Mad Money mockery of Travelzoo (NAS: TZOO) . TV personality Jim Cramer told owners to dump the shares, and investors responded by doing just that. Today, the company responded by announcing it intends to buy shares -- 500,000 of 'em -- and investors are taking the announcement as good news, bidding Travelzoo up 11%.

So what: Why should investors care if Travelzoo buys back its own stock? On the one hand, they're hoping all the new buying activity will help support the stock price. On the other hand, by buying back (and presumably then retiring) these shares, Travelzoo reduces its share count, so that every dollar of profit it earns now gets divided among fewer shares. Reducing the shares outstanding, in other words, should improve profits per share at Travelzoo.

Now what: What's more, it probably will improve profits. I mean, buying 500,000 shares at just $34 and change apiece is only going to set Travelzoo back $17 million or so. The company has more than $40 million in its bank account, and can fund this buyback easily. Plus, it is a bona fide cash-producing business these days, generating nearly $10 million in free cash flow over the past 52 weeks.

In short, there's every reason to expect the buyback to go through as announced, and to benefit shareholders. I personally don't think the benefit is big enough to justify a market cap nearly 60 times as high as Travelzoo's free cash flow, but apparently management disagrees.

Bears versus bulls -- who will carry the day?Add Travelzoo to your Watchlistand find out.

At the time this article was published  Fool contributorRich Smithdoes not own (or short) Travelzoo, butMotley Fool newsletter serviceshave recommended buying shares of Travelzoo. The Motley Fool has adisclosure policy. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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