Wall Street Buys Netflix, Savvy Investors Prefer Coinstar

NEW YORK (TheStreet) -- Fund manager David Einhorn made headlines for a few days when he called Apple (AAPL) "misunderstood."

Next, Einhorn will cry that he -- or Apple -- is broke.

Plenty of misunderstood stocks exist. Some are bid higher because longs lack the capacity or refuse to see the obvious. Netflix ( NFLX) goes down as 2011's best example of this. And then there are stocks that confound investors because they do not fully understand key aspects of the company's story. Apple fits neither category; in fact, it's probably one of the most straightforward propositions the market has to offer. Heck, it's up about 134% over the last two years.

Investors misunderstand Coinstar ( CSTR) as much as they misunderstand Netflix.

While I have never been much of a Coinstar bull, its management, despite a guidance misstep here and there, appears to have a steadier handle on its business than Reed Hastings has on Netflix. For whatever reason, investors have bid up a stock floated by a company with an unworkable, scatterbrain business model, rather than one that moves forward prudently.

Netflix, for all intents and purposes, abandoned its DVD business prematurely. It took the emphasis off a highly profitable segment that generated desperately needed cash to focus on what Hastings considers the future: streaming. While few would argue with that vision, you cannot push it before its ready. Sometimes, you just have to let the future come to you. DVDs have not yet died; in fact, they have quite a bit of life left in them.

I think Coinstar realizes this, though it's difficult to tell. Coinstar executives do not routinely update investors with Facebook ( FB) postings and YouTube videos. They prefer official avenues, such as public Securities and Exchange Commission filings.

Coinstar clearly benefited from Netflix's well-publicized problems, with its stock climbing about 49% year-to-date. Despite that gain, investors have yet to value it anywhere near where they valued Netflix at the height of its absurdity. Even today, with Netflix posting losses, it sports a loftier stock price relative to Coinstar.

Both companies report earnings later this month. In a perfect world, I would buy Coinstar ahead of earnings and sell Netflix, but Wall Street is even more imperfect than real life.

Netflix can hold a dog and pony show and rev itself back to $100. Coinstar can report strong, yet boring results and still trail the sexier Netflix.

As far as long-term investments go, I have to think investors will come around to Coinstar as its model unfolds. Coinstar correctly chose to take its time before diving into streaming. It signed onto a DVD-rental and streaming-video venture with Verizon ( VZ) back in February, and its service does not start up until later this year.

Neither Verizon nor Coinstar has said much about their plans. I have to think, however, that Verizon will leverage the relationships it has with content providers through its FIOS television service to secure digital content for the streaming partnership. It will likely have to because, as Hastings has said, to compete with Netflix, you need to spend about $1 billion a year on programming. While Verizon could certainly swing that, I don't think they want to. And they might not have to.

In any event, Coinstar takes just a 35% stake in the collaboration. That's smart. Milk the DVD cash cow for all its worth and get into the streaming game as the minority partner with a company that has well over $100 billion in annual revenue and more than $6 billion in cash. Talk about setting yourself up. Netflix absolutely should have knocked on Verizon's door before Coinstar.

If irrationality was not one of the biggest factors to consider in the stock market, I would be all over the "Buy CSTR, Sell NFLX" mantra. It makes perfect sense, but only in a perfect world.

I would not touch either stock prior to earnings. However, on weakness, I would consider selling CSTR puts to get long or opening up a small position as a precursor to an ongoing series of dollar-cost-average investments.

At the time of publication, the author held no positions in any of the stocks mentioned in this article.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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