HomeAway (AWAY) - Run Away From This One....

The thesis on this positioning is quite compelling – timing may be the one issue as investors have been disregarding any “bad” news or a company’s questionable outlook of late. The recent squeeze that we saw last week was based on speculation that Priceline PCLN could be a suitor. Nice try, but that does not appear to be likely.

We have been looking at HomeAway AWAY as the stock has recently been recovering from a deep sell-off after their earnings report on 7/25/13. While the company beat estimates, the growth of paid listings has slowed and several large holders have also been selling the stock.

(We discussed this stock on a recent TDI Podcast)

One of the more concerning items that has been popping up in the news is related to the rental property fraud/scams. There are plenty of examples like this one that was reported in the Seattle Times.

Another example is reported by Equifax :

The Better Business Bureau recently warned vacationers about potential scams that can include fraudsters creating fake listings for homes they don’t own. Someone else may have legitimately listed the homes for rent elsewhere, or the listings may be for homes that are not even for rent or sale at all.

It seems pretty easy for a listing to go up for a rental that is not actually owned by the listing party. In fact, on the Homeaway website, they recommended that personal contact via phone or otherwise is a good idea before renting. Obviously the company must know that there is the potential for scam artists to make off with deposits of unsuspecting vacationers.

On the user forum for VBRO.com, there are discussions about the company not having any verification process for listings. Homeaway has recognized that there are scammers out there and they target the company, but nowhere can we find that there is a process of verification done by the company. (Note that Homeaway operates under several different "names/sites" in several countries)

The company has seen an explosion in revenues since it began publicly reporting. However, when doing an analysis of the revenue and margins (with estimates) the trend is pointing downward. This will be magnified if the company continues to receive bad press if the scams continue. If they decide to invest in a solution for fraud prevention and verification this could be a drag on earnings. Either way, there may be additional costs or the potential for a revenue slowdown.

As for the overall fundamental scoring, we see that the company scores a 2.1. This is made up of several ratios and factors that we use to analyze the strength of the underlying company.

Technical indicators are also very weak. In fact, this is the weaker of the two components that we use to score a stock.

Overall the company now scores a 1.3, which is a "sell" using our scoring process.

Recently, the company reported earnings that beat estimates nicely and slightly above on sales. We looked back on the latest quarterly results and compared the surprise for both EPS and sales to the price action following the reports. The average historical EPS surprise is 13.04% and the company had beat estimates 5 out of the last 8 reports. As the latest earnings report did not surpass the average surprise, the stock sold off following the release.

This is a growth stock and the growth versus comps were just in-line this quarter. This stock needs accelerating growth to keep its price at these levels.

Looking at the ratings from the 16 analysts, it is apparent that they are less than enthusiastic on average. The current breakdown is: Buys (50%), Holds (37%) and Sells (12.5%).

The bottom line is that while the historical fundamentals are impressive, there are some big concerns looking forward. In particular the growth is not keeping pace with the valuation. Beyond that, and perhaps even more important, is the growing scams and fraud related to rentals. If the company does not look into some form of ownership verification (which at this point is does not appear to something they are pursuing) there is the potential that both owners and renters will be very reluctant to utilize the company's services. At the heart of the matter is the trust in the transaction. It wasn't too many years ago that people were unwilling to give their credit card information over the internet. Of course the use of credit cards or other "safer" payment methods compared to checks will provide a greater level of security since they can be disputed. However, often times vacation home rental arrangements are locally based and credit cards may not be accepted by the homeowner. So, in theory it makes sense, but in reality owners may be unwilling to pay for a credit card processor for their rental unit.

We have been watching for a break below $30.80 for the potential of another leg down toward $28. The price broke support and now there is a "fast-zone" (lack of participation and volume support) toward $22.50.

Disclosure: Horowitz & Company clients hold short positions in this security as of the publication date.