Travelzoo’s Skidoo

By Christopher Byron
New York Post
October 18, 2004

Penny stocks have come in for some much-warranted scolding in this space recently. Yet every once in a while a company with an authentic business plan and a workable strategy for executing it escapes from the land of the penny stock undead and into the more civilized environs of a listing on Nasdaq itself or even one of the Exchanges.

This week we look at one such stock — New York-based Travelzoo.com, Inc. - which began life on the swindle-soaked Over The Counter Bulletin Board only to wind up one of the hottest stocks of the year on the Nasdaq National Market quotation service, with an astonishing 1,612% gain over the past twelve months to a recent high of $76.58 per share.

For reasons that we'll get into in more detail shortly, Travelzoo's stock has lately begun to weaken, closing down last Friday at $61.74 per share. Yet that's probably not a matter of great concern to Travelzoo's somewhat dweebish-looking founder, chairman and CEO, one Ralph Bartel, who owns 87% of the company's stock and effectively suckered short-sellers attacking his company into one of the cleverest short-squeeze traps on record.

In the process, Travelzoo's stock took off for the moon, enabling Bartel to raise $30 million in cash through a deeply-discounted private placement of its shares last month with a group of hedge funds, while Bartel himself emerged as New York's newest stock market billionaire.

But before getting further into any of that, first an update on other, and less inspiring, developments in Wall Street's various arenas for low-priced stocks, which are on fire as never before in this otherwise drifting market.

To that end, we last week looked in on a New Mexico-based penny stock called CDC Systems Inc. and its Houston-based promoter, Patrick Arnett — and they still haven't gotten over the experience that resulted.

CDC Systems, Inc., claims to be in the capital-intensive business of producing sophisticated, state-of-the-art industrial compressors for the natural gas industry. But the company has no known business history earlier than its establishment as a Delaware corporation this summer. And just as is the case with nearly all other stocks that are quoted in the gray market "pink sheets," the company has no current financial reports on file with the SEC and its stock is not registered for public sale to anyone.

To blunt these and other criticisms, the company issued a bar rage of press releases claiming, falsely, that I had not contacted the company for comment prior to publication. Previously, the company's principal press contact had been Arnett, who'd issued 14 separate press releases hyping the stock, beginning in late September. In the press releases, he was identified as a corporate communications official for a Web site called Stockcomm.com.

But in the wake of my column, new releases began pouring forth via an organization calling itself OTC Reports, under the signature of a person named C.P. Barry. That name also appears on press releases for various other stocks that Arnett has been touting, and surfaces regularly on press releases issued by several seemingly unrelated stock-touting operations, including Stocksplits.com, Iocircuit.com, and EarlyAlerts.com, which along with OTC Reports, all share a common address in the town of New Harmony, Pa.

This sort of games- playing is typical of the hype and malarkey that unfolds nonstop on the penny stock market, where the shares of thousands upon thousands of moribund, failing, and even defunct businesses are bought and sold daily by traders and promoters looking to profit from the naiveté and greed of the public at large.

Yet you'll find no such players swirling around this year's dizzying upward ride in the shares of Travelzoo.com. Instead, the patsies in this case have turned out to be one of the savviest groups on Wall Street: the market's so-called short-sellers.

Travelzoo was created in the spring of 1998 by a young fellow named Ralph Bartel, who had earned a doctorate in journalism and the media from a university in Germany and had been working as a management assistant at the Grunner und Jahr publishing house.

It was at that point that he hit upon an idea for an internet-based travel business that in retrospect looks both obvious and brilliant: start a Web site containing nothing but advertisements for the one thing every traveler wants to know — namely, what's the cheapest flight (or car rental, or hotel room, or package tour, or you name it) to anywhere.

Travelzoo began operations as a private company, based in the Bahamas, then moved to California and registered as a public company with the Securities and Exchange Commission, at which point it began trading, sporadically on the OTC Bulletin Board.

Meanwhile, with the bulk of the stock in the hands of Bartel, the company extended an intriguing and attention-getting offer to the public: anyone who wanted to register as a visitior to the Travelzoo Web site could receive, free of charge, shares in the company.

This led to the issuance of roughly 5.2 million such shares, reducing Bartel's stake accordingly. But this was followed in 2002 by the merger of the company into a new, Delaware incorporated entity. And since fine print in the original offering of free stock to the public required recipients to certify that they 18 years of age and were U.S. or Canadian residents — something that few recipients bothered to do — Bartel had the right to cancel their shares after two years had passed.

By the spring of this year, Travelzoo had moved to New York and begun to gain traction as a real business. Subscribers to the website had nearly doubled from 2002 to 6.1 million, while revenues — nearly all of which was coming from travel industry advertisers promoting their deals — had likewise nearly doubled, to just under $18 million, putting $2 million on the bottom line as profit.

In reaction, the stock began to move from less than $5 per share at the start of the year to $10 by the start of spring.

Thinking perhaps that it was rising too fast, short-sellers began to circle. And when they did Bartel sprang his trap, announcing that of the roughly 19 million shares outstanding, more than four million were being cancelled because the recipients had never bothered to certify their ages and countries of residence.

This automatically reduced the public float by 80%, lifting Bartel's control back to more than 87%, while causing suddenly anxious short-sellers to begin chasing the stock that still remained public in order to close out their positions, which of course simply caused the stock's rise to accelerate.

It was the start of a classic short squeeze, and it is only now beginning to unwind as one short-seller after the next gets carried out, feet-first, reducing demand for the shares accordingly.

There were no laws broken in any of this. No trickily-worded press releases were sent out by anyone. The only thing that happened was that a group of clever professionals got over-confident in what they were up to, and began shorting a stock without ever bothering to read the fine print that had been attached to it.

But this is the penny stock market, where even the pros can get hosed — and all on the up-and-up. So imagine the chances an investor enjoys when he's up against opponents, unlike young Herr Bartel, who are unburdened with scruples of any sort

 

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