Why Travel Stocks Could Rally in a Big Way

Will 2012 bring another year of "stay-cations?" Not if Priceline.com (Nasdaq: PCLN ) is any indication. The purveyor of airline and hotel discounts recently reported a 35% jump in fourth-quarter sales, to $991 million (compared with a year earlier). And that was in a seasonally-weak quarter. Sales may hit $1.4 billion by the second quarter, according to analysts.

Back in mid-December, I laid out a case whyshares could quickly surge to $650 or $700 by the end of 2012. As this chart shows, we're almost there.

Though Priceline.com's stock could easily breach the $700 target I suggested a few months ago, the travel industry now offers better bargains for investors. I've been looking for travel-related firms that do a lot of business in the spring, summer and fall, and have found a few compelling bargains.

First off, regular readers know that I'm a big fan of Zipcar (NYSE: ZIP ) , which is a member of my $100,000 Real-Money Portfolio . As I noted here , when the weather warms up, demand for Zipcar's vehicles surge higher. The company looks set to deliver robust results in the June and September quarters.

Also worth researching...

1. TravelCenters of America (NYSE: TA )

I wrote about this company at the end of December . Though it's up 20% since then, it's still quite cheap at a recent $5, well below the $11 tangible book value . This is more of a play on trucking, but the company's 200 rest stops also attract a lot of consumers that need to tank up on gas and burgers on their road trips.

2. HomeAway (Nasdaq: AWAY )

This Austin, Texas-based operator of vacation rental properties was a hot IPO last June, opening above $40 on its first day of trading. Shares have pulled back to the mid $20s and now look more like a value play and less like a frothy IPO.

HomeAway, which operates an eponymously-named website along with VRBO.com, vacationrentals.com and other sites, is a natural extension of the recent real estate crash. Many people bought lavish second homes in the middle of the last decade and now find themselves financially over-extended. They could sell those homes, at a likely loss, or they can garner some rental income on their properties to help offset annual expenses.

It's not a distinctly American phenomenon. HomeAway runs nearly 700,000 listings per year in roughly 150 countries. As a point of reference, HomeAway has twice as many as listings as its three largest rivals (TripAdvisor, Wyndham and AirBnB combined). Consumers love it too. You can often rent an entire house for what a hotel room costs, or rent a room in someone's home for less money than a hotel room.

And it's a bigger market than you realize: Goldman Sachs pegs it at $85 billion annually. To extend an analogy to Priceline.com, Goldman Sachs notes that HomeAway's potential addressable market is one-fourth the size of Priceline's, yet Priceline now has a market value that is 15 times larger.

HomeAway's massive database creates a powerful virtuous cycle, known as "network effects." Consumers can find more rental choices on the company's various sites, driving more traffic. The higher traffic causes homeowners and property managers to migrate to where the action resides.

So why are shares well off of their highs? Three reasons...

• Investors got carried away with their growth assumptions after seeing that the company boosted sales at least 35% in each of the last five years. Instead, 20% annual growth is a much more reasonable target, according to management, and analysts were forced to lower their revenue assumptions as a result.

• A huge lock-up expiration. Roughly 10% of the company's stock was sold at the IPO. Much of the rest came on to the market in January and February 2012, and that big spike led many to dump shares in anticipation.

• Management plans to hike spending on software and other parts of the technology platform, which will dampen 2012 profits. Earnings are expected to drop from $0.70 per share in 2011 to just $0.47 per share in 2012.

Risks to Consider: This is a growing niche that is bound to attract more competition, and HomeAway will need to fight to maintain market share .

Action to Take --> Any of the stocks I've mentioned previously in this piece are good candidates worth further research, but HomeAway is obviously intriguing to my mind.

Even with the sell-off, shares aren't cheap, trading at more than 40 times projected 2013 profits. But the company appears to have just scratched the surface on what appears to be one of the fast-growing sectors in the leisure and lodging industry. With the share lock-up now expired, more reasonable revenue growth assumptions in place and a path toward much higher sales and profits in place by the middle of the decade, this busted IPO should have a more bullish sophomore year.

[ Note: You can also follow along with my $100,000 Real-Money Portfolio trades free for a limited time. Simply click on this link to sign up .]

-- David Sterman

David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of ZIP in one or more if its "real money" portfolios.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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