Travelzoo Growls Back

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A short squeeze may be under way at Travelzoo (NAS: TZOO) .

The travel deals publisher is trading higher today after a Jefferies analyst initiated coverage with a buy rating. Global economic uncertainties and competitive threats are risks, but Jefferies feels that the potential upside of Travelzoo's strong position in delivering local deals is too juicy to ignore.

Jefferies is establishing a price target of $35.

Travelzoo has been one of the hardest-hit companies during the summer downturn. The company with 24 million worldwide subscribers to its weekly emails of sponsored vacation bargains hit a new high of $103.80 back in April and traded as high as $90.80 in July. It was all downhill after that, and the stock appears to have bottomed out last Tuesday at $20.68.

A roughly 80% plunge from peak to trough is brutal, especially since Travelzoo has really only had one material piece of bad news. It missed Wall Street's estimates during the second quarter, though it's hard to get down on a company when revenue and earnings climb 34% and 51%, respectively.

Travelzoo's had a strong run since last week's low. The Web-based speedster was one of last week's biggest winners, soaring 20% in leading the market higher. It's holding up for an encore performance of double-digit percentage gains this week.

Analysts had no choice but to lower their price targets during the earlier swoon. Wedbush, Benchmark, and Morgan Keegan dropped their near-term goals to $52, $45, and $32, respectively, during the freefall. Travelzoo continues to trade below all three targets.

Travelzoo's push to hop on the Groupon bandwagon by adding pre-paid vouchers last summer was a hit with investors. Publicly traded companies that embraced the Groupon model -- Travelzoo, OpenTable (NAS: OPEN) , and to a lesser extent The Knot parent XO Group (NYS: XOXO) -- took off since investors couldn't buy into Groupon itself.

The market's been souring on Groupon in recent months during its bumbling IPO process, and Travelzoo and OpenTable have taken the brunt of the damage.

There were 4.4 million shares of Travelzoo sold short at the end of last month, a large sum given Travelzoo's thin float. Shorts were obviously rewarded on the way down, but they have to be nervous after watching Travelzoo on the way to back-to-back weeks of double-digit gains. This is starting to feel like a short squeeze, where bears lock in their gains because they know Travelzoo is as volatile as they come in both directions.

The trend has clearly been bullish since bottoming out eight days ago. Get in the way of a momentum stock like this at your own risk.

If you want to see if the bulls or the bears have the last laugh, track the company by addingTravelzooto My Watchlist.

At the time this article was published Motley Fool newsletter services have recommended buying shares of OpenTable and Travelzoo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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