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What goes up..

February 11th, 2011 · No Comments

With an RSI of 93, is this thing is due for a breather?
How about this for a graph?

Today (Thursay February 10 2011), the closing quote is $12.36 (this graph self updates).

This certainly looks like a heck of a rally losing steam as it is running into heavily overbought territory.

TravelCenters of America (TA) operates (it used to own) truck stops along the US interstate highways. It did sell those properties to Hospitality Properties Trust (HPT) in 2007, and leased the same properties from them. That didn’t turn out to be a wise decision just before the crisis, as they had huge fixed lease obligations which began to be a big burden. The stock crashed from the $40s to just $2.

The situation got so back that HPT gave TA a rent deferral of $5M a month. Here is a detailed analysis (from Jan 25, before the massive rally) the upshot of which is that the adjusted book value is some $9 per share. We’ve already exceeded that, clearly something happened at the beginning of February, when the stock price doubled in a day.

The guy (SkepticLLC) writing that analysis really hit the hammer on the nail with this:

I believe that at $3.80 per share (an approximately $65 million market cap),TA offers a good margin of safety on a valuation basis, and the implicit standby TARP from HPT provides a measure of downside support. However, I believe that the upcoming negotiation on the deferred rent offers a great chance for a redo on the lease agreement that would be a win/win for all sides.

Because that’s exactly what happened. There was a considerable reduction in rent (some $42M, from $231.3M to $189.3M) and the deferred rent is further deferred.

This has our guy jumping for joy, understandably. With him jumped the stock price, a cool 100%+ in a day. Not satisfied with that, SkepticLLC argued on Feb 2 that

While the stock more than doubled following the news of the new lease agreements, I believe it remains materially undervalued at the current level of approximately $9/share based on the new leases. As shown above, I believe that substantial upside remains to bring the stock up to even a conservative valuation range of 5x-6x EBITDA based on the improved financials, which stand to benefit further from the ongoing economic recovery.

If you read the article, you’d know that he’s talking about stockprices of $20+. Now, that might very well be (as the economy is recovering as well), but in the meantime we think that the rally is due for a breather and selling a few short-term out of the money calls would be the best way to profit from that.

A few other key metrics and data:

  • The one analyst following the stock expects a loss of $3.53 in 2010 reducing to a los of just 18 cents this year, on revenue growing from $5.94B to $6.31B
  • Actually, quarterly EPS development is already turning in profits (although the last quarter, Q3, was a disappointment of 40%)
  • Market cap is $214M, which is a bit of worry if you want to take this on as a short, because it is a small fraction of sales (0.04%!).
  • Cash ($99M) exceeds debt ($170M)

Tags: Technical Trading Ideas