This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

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 - Get Report) is rolling out its own monthly online music service at a significantly lower price than the competition sent shares of RealNetworks (RNWK - Get Report) 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 - Get Report) 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.

In the long run, we remain bearish on this group, primarily because of the stiff competition within it. Yahoo! will price its monthly downloadable music service at $6.99 a month, and we believe this will lead to margin compression in the long term. And Apple will likely come to market with a subscription-based product at some point, putting further pressure on margins of the smaller competitors. As such, we would put 10% stops on these two trades, and close them out by Friday.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Napster to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
David Peltier is a research associate at TheStreet.com In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier welcomes your feedback and invites you to send your comments to david.peltier@thestreet.com .

Interested in more writings from David Peltier? Check out his newsletter, TheStreet.com Dividend Stock Advisor. For more information, click here.

William Gabrielski is a research associate at TheStreet.com and is accredited with a Series 7 license. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabrielski welcomes your feedback and invites you to send your comments to william.gabrielski@thestreet.com .

Interested in more writings from William Gabrielski? Check out Stocks Under $10. For more information, click here.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
AAPL $112.76 -0.47%
RNWK $4.32 3.10%
YHOO $32.25 -2.70%
FB $89.43 -1.74%
GOOG $618.25 -1.92%

Markets

Chart of I:DJI
DOW 16,528.03 -114.98 -0.69%
S&P 500 1,972.18 -16.69 -0.84%
NASDAQ 4,776.5080 -51.8170 -1.07%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs