Two Pullbacks Sing Opportunity
Editor's note: This is a special bonus column for readers of RealMoney and TheStreet.com. This piece originally was sent to Stocks Under $10 subscribers, at 11:12 a.m. EDT on May 11. Sign up now to find out more about the TSC Investment Team's strategy and get an email alert before every trade. Just click here.
News that Yahoo! (YHOO) is rolling out its own monthly online music service at a significantly lower price than the competition sent shares of RealNetworks (RNWK) and Napster (NAPS) plunging this morning to $5.80 and $4.27, respectively.
We believe investors who want a short-term trade should consider taking a long position in these two stocks. (We aren't taking any action because we are fully invested.)
We view the respective 20% and 30% selloffs Wednesday morning in RealNetworks and Napster as overdone and believe Napster's earnings report after the close will drive shares of both companies 10% higher by the end of the week. Analysts expect the company to lose 62 cents a share on sales of $17 million.We expect Napster to surpass these analyst expectations in its earnings report, similar to the performance that competitor RealNetworks delivered last week. For the first quarter, RealNetworks had sales of $76.6 million, up 27% year over year, and above consensus revenue estimates of $75 million. Break-even earnings came in ahead of analyst expectations for a penny-a-share loss. RealNetworks also raised revenue guidance by $10 million to a range of $320 million to $330 million, and raised EBITDA guidance by $3 million to a range of $25 million to $28 million. Today's announcement of RealNetworks' acquisition of mobile games designer Mr.Goodliving.com adds another $3 million in sales for 2005 that is not in its previously issued guidance. Also, Yahoo!'s music page reveals that its format for digital music is not compatible with Apple's (AAPL) iPod. While this will likely change in the near term, it has not been widely reported in the press and will likely cause investors to reconsider their near-term opinions of RealNetworks and Napster. Both companies are sitting on healthy cash balances that limit near-term downside potential. RealNetworks has $2.16 a share in cash and some long-term investments on the balance sheet, while Napster has about $3 a share in net cash. Also, 17% of Napster shares and 6.5% of RealNetworks' shares are sold short, so any good news in Napster's earnings tonight could lead to a nice move higher tomorrow.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV