After a summer lull, La Quinta Motor Inns appears to be on the upward trek again. Its stock has risen to 19 a share from 15 in mid-July. But don't bet on La Quinta staying on the high road, say some investors who have started shorting the stock. They warn that it could tumble to as low as 10. Here's why:
La Quinta, owner and operator of a chain of 200 inns located in 29 states, is at best "a chancy bet," says a California fund manager, because of the current proxy fight being waged by a dissident group at La Quinta Motor Inns LP, a publicly traded limited partnership that owns 31 La Quinta Inns and 20 restaurants in 15 states. These 31 motels are among those that La Quinta Motor Inns manages. And they are "a big deal" for the latter's bottom line.
Last year, La Quinta partnership-owned motels accounted for "about $5 million of the $6 million earned by La Quinta Motor Inns," says the editor of the Overpriced Stock Service newsletter, who uses the name Ursa Major. The dissident group, led by Ronin Partners, believes that the La Quinta partnership is paying La Quinta Motor Inns "far too much money" for running its motels, explains Major. So the dissidents want to liquidate the partnership and sell the properties. If it does, La Quinta Motor Inns' earnings will almost disappear, says Major.
"Without the income from the partnership, we think LQM can sell down to its book value of 9 to 10 a share," says Major. He figures there's little risk in shorting the stock. Even if the dissidents lose the proxy battle, he says, "we don't see this stock trading above its 12-month high of 19."