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As we'll do from time to time, we want to alert you to a single-digit stock that we believe you should not buy, even though it's moving in that day's market. We recognize that the money-making process involves both buying the right stocks at the right price and avoiding the wrong stocks, even when they appear to sport attractive stock prices.
, which sells digital and video recording devices, is down 25% since May 25, when it announced results for the April quarter. Higher service and technology revenue helped the company beat estimates in the second quarter, and
, which accounted for 73% of TiVo's first-quarter additions, added 196,000 subscribers in the quarter -- nearly five times the amount it contributed in the same quarter last year.
Despite the strong quarter, management lowered its second-quarter revenue guidance.
Since then, rumors have been circulating in the market that the company was on the verge of a much-needed supplier deal with
, though there is nothing to confirm this. And as tempting as this pullback may be, there are other potential negatives for TiVo that give us an uneasy feeling about diving in and buying the stock here at around $6.73 as we write this.
As strong as the DirecTV business has been for TiVo, last Friday, DirecTV's Vice Chairman Eddie Hartenstein resigned from TiVo's board, removing what little near-term confidence we might have had in the stock. In addition, DirecTV sold its 3.5 million-share stake in the company, increasing speculation that the relationship may be on the rocks.
From our analysis, there are few catalysts on the horizon that can prop up TiVo's stock, other than a possible cable deal that we mentioned above, and we simply don't see that happening any time soon. The bottom line is that speculating in the under $10 space requires a risk/reward discipline that takes into account the likelihood of different scenarios playing out. We are betting TiVo will not announce a cable deal in the near term, and fears that DirecTV may be looking elsewhere when its deal expires in 2007 make TiVo a risk/reward loser.
With plenty of worthwhile stocks in the under $10 space to own, we are going to stay away from TiVo for now.
TheStreet.com Investment Team is David Peltier and Will Gabrielski.