NEW YORK (TheStreet) -- If you're a current Coinstar (CSTR) - Get Report investor Thursday's earnings release must have felt like getting a DVD stuck halfway in the machine while running late on your way to work.
Coinstar's stock increased about 6% from a year ago and remains in a bullish trend. Coinstar's CEO Paul Davis announced revenue growth of 22%. While part of the perceived weakness looking forward is attributed to rental weakness, Coinstar and Redbox continue to mint mountains of coins.
At least most of the market cap losses appear to be baked in the cake at this point. Coinstar is currently valued with a price-to-earnings ratio of only 10.
Historically, stocks with a price-to-earnings ratio under 20 outperform stocks with multiples over 20. Does this mean you should not invest in growth companies sporting multiples above 20? No, however, it does mean when you consider an investment such as Coinstar, you should look for dips in the price as buying opportunities. Thursday's after-hours fall was more turbulence than a shifting sentiment in the company or management.
recent earnings release was met with tempered ingestion and price plunge. It appears reasonable then that Coinstar was facing a selloff with anything other than a strong beat on every metric. (Read my
Surviving Netflix in an Apple and Amazon World article.)
Based on my experience with gap downs following guidance similar to Coinstar's, investors will likely see the short-term low Monday or possibly Tuesday (sooner more likely than later). With Friday's opening gap down price of $51.20 and after hours trading reaching a low on Thursday near $48, more downside pressure probably won't last long.
Bargain hunters and the few short sellers covering positions could push the price up over $55 by early next month. Looking at the chart, I expect short-term resistance near $54 and again at $55.60.
Round numbers often attract like a price magnet and repel, causing a bounce. Expect a lot of volume to trade near $50 a share Friday and Monday, but also be prepared for bargain hunters to start positions under $49 as an entry.
Coinstar doesn't have a lot of debt relative to cash and the price-to-earnings multiple isn't high compared to the
The company simply didn't miss by much and I view the price increase as the right choice. In fact, it would not surprise me in the least if the company "pushed" some current sales into the next quarter to ensure a smooth transition with the Java machines. It's good for employee morale and doesn't take away from the fiscal year to make it happen.
If you are reviewing Friday's price drop to signal a buying opportunity, you are likely to find Monday or the opening on Tuesday to be near the sweet spot. At the same time, there is no hurry jumping on board with Coinstar. Stocks dumping as a result of lowered guidance usually take a full two good earnings quarters to recover. I believe the odds favor a faster than normal recovery.
For an idea what another earnings report gap down usually looks like with a company still growing, take a look at
chart. Red Hat disappointed and traded from $56.50 down to an intraday low of $51.02.
Also, take close note of the next few days after earnings. The takeaway is the open is lower than the close. That demonstrates buyers stepping up to take advantage of the cheap shares. Coinstar may not close higher than the open, but the first initial weakness followed by strength is encouraging.
This is a pattern I see often, and you can too. Simply use your software to look at charts from the past few quarters and review the ones that gapped down the next day.
The main difference between Netflix and Coinstar is Coinstar is still clearly executing, but just slightly missed on guidance in a quarter that they reported strong revenue growth. All in all, the earnings release was a good one.
With the other offerings from Coinstar in the pipeline, I expect the storm clouds to pass quickly.
Timothy Collins recently wrote about Coinstar volatility
Looking at Two Earnings Plays. (You need a Real Money Pro account to read, but Collins' analysis makes it worthwhile.)
From the conference call on Thursday, CFO J. Scott Di Valerio said:
... We did report solid Q2 results today with revenue of $532 million, up 22%, as Paul said, really driven out of our Redbox business, which grew at 26%, according to same-store sales of 16.5%.
55% of bookings came from the Americas, 25% from EMEA and 20% -- excuse me, and 20% from Asia Pacific.
... We've crossed the $1 billion mark in the first half of the year and well on the way to cross well over the $2 billion mark for the rest of the year as we go through the rest of the year. And it was only three years ago that we crossed the $1 billion mark for the first time as a company . . . .
What's the best play with Coinstar? There should be a very attractive trade coming up Monday and or Tuesday. Near the end of the day if still trading lower, sell out of the money puts.
Fear of continued losses tends to push portfolio insurance prices up dramatically, while at the same time, the stock should find support.
It's not one to get greedy with; hold on for a few days and as the implied volatility falls (hopefully with a nice dead cat bounce) exit out with a quick hit and run for profits.
Otherwise for longer term investors, the best play is to wait until we are closer to the next earnings release for an entry.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.