GameStop Fiasco Drives Opportunity in TravelCenters

GameStop Fiasco Drives Opportunity in TravelCenters

Shares of GameStop Corp. (NYSE: GME) soared last week as the messy public standoff between professional short-sellers and newbie-online traders continued. Now, investors should begin to focus on the fallout.

To acquire GameStop shares, pros are redeeming the SPDR S&P Retail ETF (NYSE: XRT), creating artificial selling pressure for the other shares in the fund.

That’s why it’s time to take a look at shares of TravelCenters of America Inc. (Nasdaq: TA), one of the most attractive components of the ETF.

Hedge fund managers are correct to be concerned by GameStop dustup. Traders on WallStreetBets, the Reddit group, have pushed shares up 1,630% in January alone. Managers at hedge fund Melvin Capital covered the firm’s sizeable short position on Tuesday afternoon for a big loss.

The Wall Street Journal noted Wednesday that Citadel and Point 72, giant hedge funds run by billionaire investors Ken Griffin and Steven Cohen, made loans to Melvin Capital totaling at least $2.75 billion.

Score one for the online rabble rousers.

What the Reddit mob might be missing is that the big hedge funds still have the upper hand. By design, their portfolios are set up for extreme flexibility. Making the transition from bearish to bullish and back to bearish again is a feature. Hedge funds are also designed to exploit market inefficiencies.

This is now clearly happening with XRT. Given its rise, GameStop shares account for a whopping 20% of the total value of the fund. Price volatility from one day to the next is extreme.

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Fixing price discrepancies between the price of the ETF and fair market value of the underlying portfolio occurs through a mechanism of creation and redemption.

Explained here at, redemption occurs when authorized large institutions exchange ETF units with the issuing trust for the underlying securities. Those shares are then typically sold back into the open market to flatten the discrepancy.

Last week, the number of outstanding XRT units declined from 10 million to 2 million, according to analysis from Bespoke Investment Group.

The firm notes that pros are probably redeeming XRTs, stripping out the GameStop shares to either lend out or cover existing short positions, then liquidating the rest of the fund’s shares in the open market, creating artificial selling pressure for those stocks.

TravelCenters of America was the worst performing XRT component during the past week, down 14.8% even as the fund soared. The Westlake, Ohio-based company operates 270 full-service travel centers under the brand names TA, TA Express and Petro Stopping Centers across the United States. These facilities are geared toward truck refueling, repair and driver services such as restaurants, showers, laundry and Wi-Fi access.

Company sites are typically larger than those of competitors, sitting on 25 acres of land with parking for 200 trucks. They also offer greater potential to be remade through digital transformation.

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In 2019, Jonathan Pertchik joined TravelCenters as the new CEO. Pertchik previously held the top position at Starwood Capital’s In Town Suites. His first action was to raise $80 million in new capital for information technology infrastructure, including real-time data analytics. Some of the funds were also used to catch up on deferred property maintenance.

By the looks of it, the turnaround is working.

Gross margins on fuel are up almost a penny per gallon, resulting in an additional $22 million in gross profit through the first three quarters of 2020. Total EBITA during that time frame was $361 million, versus $352 million all of 2019.

As businesses, TravelCenters and GameStop are day and night. The former is in the midst of a strong turnaround and its shares had performed well until recently. GameStop business fortunes are in decline as video game sales move online … yet its shares have become the front line of a fierce battle between professional money managers and the online mob.   

The common thread is the SPDR S&P Retail ETF. At least for now, TravelCenters is a casualty in the scramble to acquire GameStop shares. Although if history is any indication, this will not last. At some point, the short squeeze will fade and large financial institutions will begin creating new XRT units. Artificial selling pressure will reverse.

So, when you combine that fact with the turnaround story, it makes the company look like an especially great investment opportunity.

TravelCenter shares trade at 25.4 times forward earnings and only 0.08 times sales. The stock pushed to a 52-week high of $35.80 in late December, immediately ahead of the GameStop short squeeze.

Longer-term investors should consider buying the stock into this decline.    

Best wishes,

Jon D. Markman

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