On September 19, the markets pretty much remained flat. The SPDR S&P 500 ETF [SPY]—a fund that tracks the broader market—rose marginally by 0.12% to $291.25 while the Invesco QQQ Trust ETF [QQQ] fell by 0.08%.
But you always have a few outliers that score big in spite of market-wide silence, outperforming the equity markets at large.
Online hotel booking aggregator Trivago NV [TRVG] was one such stock, gaining a remarkable 13.8% yesterday—good for $200M in market cap appreciation.
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What triggered Trivago’s rally?
Generally, when a stock experiences a double-digit gain, there's some underlying reason. It can either be tied to a deal, an acquisition, or a change in the global environment or impressive quarterly results.
But this wasn’t the case for Trivago.
There was neither important stock-related news or industry-related information that drove the shares up. Shares of peer companies such as Expedia [EXPE], TripAdvisor [TRIP] and Booking Holdings [BKNG] were largely not impacted yesterday.
So what was it?
The Trivago NV stock’s climb was largely driven by a short squeeze or short covering. A trader takes a short position when he expects the stock price of a firm to decline. It is essentially a bet that the shares of a company will decline.
Basically, a short covering is when a trader purchases shares to close out or offset an existing short position.
For example, if a trader short-sells 100 shares of Company A for $10, indicating an investment of $1,000. If company A’s shares fall to $8, a trader might buy $100 shares for $800 to cover his position.
The overall profit, in this case, is $200. A short squeeze is a rapid rise in the stock price driven by a lack of supply and an increase in demand for that particular share. This results in the short seller covering their short positions.
Getting back to Trivago NV, over 3 million shares of the firm were traded yesterday.
This is an enormous rise in volume compared to the average of 653,000 shares traded daily.
An abnormal increase in trading volume is also a sign of a short squeeze. Almost 29% of Trivago’s shares available for trading were sold short which shows that almost a third of total investors are betting against it.
Why is Trivago NV currently unfavourable among investors?
Trivago has disappointed investors with less than impressive financial results. The company is grappling with declining revenue growth. The company’s revenue is on a consistent decline for six consecutive quarters.
The stock lost over 50% of its value after its $11 IPO debut in 2016. Analysts expect the company to post revenue of $1.09B in 2018, which is 10% lower compared to revenue of $1.21B in 2017.
The analysts have a 12-month average target price of $5.07 for Trivago which means that the stock is trading at a premium of 13% to average analyst estimates.
For now, it looks like investors need to avoid Trivago NV till the company can win back revenue growth and drive profitability higher.
Article by Philip Michael, WealthLab