Most Shorted Stocks #6 – Coinstar
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I recently read an article that outlined the most shorted stocks in the market, based on percentage of shares sold short. Stocks that are shorted always fascinate me, because without leverage, the total percent that can be gained is 100%. In the traditional long trade, there is no limit to how much you can make. I guess by nature I root for the underdog, so I wanted to see if any of these most shorted stocks might represent a buying opportunity. Stocks with a heavy short interest can be volatile, but if the shorts are wrong you can see big gains in a short (pun intended) amount of time. The company ranked #6 most shorted stock by percentage of shares, is Coinstar (NASDAQ: CSTR) with 36.6% short interest.
I have to say it again, Coinstar gets no respect. I've written about Coinstar before here. In that post, I argued that physical media isn't going away as fast as people think. There are millions and millions of people who aren't set up to stream media, but they do have DVD players. In addition, I argued that their addressable market is at least 182,000 locations, and they have about 32,000 Redbox kiosks. I think you can guess my position on whether or not to short this stock. Let me run you though what has happened since my last article, and you tell me what about this company says the stock is going down. If you see something please point it out, because I don't see it. First, let's look at current price and expected growth.
Current Price: $61.71
P/E on '12 earnings: 14.58
Growth expected: 17.93%
First, I'll point out that when I wrote my last article the stock was below $50. Since then, the company released earnings that were much better than the market was expecting. Even with all of this positive news, the stock still appears undervalued. If the company does grow at nearly 18% the P/E ratio should be at least 18. This would give the stock a value of about $74. That is an implied upside of another 23%, on top of the recent run up from $40 to over $60 in the last two months.
Including the last earnings report, the company has beaten earnings in 4 of the last 4 quarters by an amazing 50.82%! That means if this trend were to continue, their 2012 full year earnings could come in as much as 50% higher than the $4.11 analysts are expecting. I can't predict if the company will continue to beat earnings estimates, but history says there is a very good chance they will.
I know that most people would point to Coinstar's competition, as a reason the company is in trouble. Let's examine that as an issue. Netflix (NASDAQ: NFLX) is mentioned most, in comparison to Coinstar. While that is a fair comparison, as Netflix does offer entertainment choices they don't necessarily compete for the same customers. As I've mentioned before, not everyone is set up for streaming Netflix services. Those who still use Netflix for DVD services are running off at an alarming rate. Netflix management has already said they expect the DVD format to die off. They don't appear interested in keeping those customers. In this same vein, Coinstar has announced they will team with Verizon to offer a streaming service. If this service is competitively priced, this could be a real threat to Netflix. The Redbox web site already allows the user to pick their favorite Redbox locations, and know what is available. These Redbox locations offer much more current movies than Netflix. In addition, Redbox offers video games that Netflix does not offer at all. When Redbox adds streaming to this offering, they will offer, DVD, Blu-ray, video games, and streaming media.
Amazon.com (NASDAQ: AMZN) offers its Amazon Prime service which does have over 15,000 titles, but their selection is much worse than Netflix. In addition, Amazon Prime has no queue service, which makes using the service a hassle. Hulu offers a better selection of current television shows, but their movie selections are laughable. Hulu also offers no physical DVDs at all. Once Coinstar gets their streaming service up and running, they will offer the most diversified portfolio of entertainment choices. The fact that they have Verizon backing the service, gives the company the financial clout to make this streaming venture work.
I just don't see the attraction to shorting Coinstar shares. The company is growing their existing business, expanding into new areas, and is generating plenty of free cash flow. I have real money invested in Coinstar. I also have a 5 year outperform call on CAPSCall for CSTR, that is one of my best calls so far. Coinstar is just getting started. Sorry to the shorts out there, but if you hold a short position, I think your pain is just beginning. Let me know what you think in the comments section below.
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