Here’s another stock that’s embarking on gains for which its chart pattern seems well prepared. Price seems poised to move into the $29 - $33 range. As with PWRD, though, we’re not endorsing it for myriad reasons, which we’ll explain.
First the good. A weekly chart shows CSTR forming a tight three week bottom, with even weekly closes before moving higher on accelerating volume last week. This morning’s favorable story in the WSJ has launched it higher, completely out of the bottoming formation.
So what’s not to like?
First, CSTR corrected over 30% off its recent high. On the surface there’s nothing wrong with that. O’Neil’s study of winning stocks shows that price often corrects as much as 35% during bull markets before resuming an advance.
But therein lays the rub. Many stocks are already advancing out of patterns and into new high territory. They corrected far less than CSTR during the recent correction and are thus better bets for big gains, as they have cleared prior resistance levels and face no headwinds on their move into new high ground.
Also, if CSTR were to shoot straight up from here it would present us with a “V” shaped formation. These are notoriously failure prone. We would far prefer to see a more rounded recovery. But in the meantime there are all those stocks on the move now, without technical barriers ahead.
Our problems with CSTR run deeper than just technical objections. CSTR has wonderful projections ahead for the next two years, with 38% growth estimates this year and 72% next. This is because of their Redbox $1 DVD rental kiosk business.
But they have a spotty history of meeting analyst earnings projections. And this is a company that has posted lower year over year profits twice in the last three quarters. The lack of actual earnings acceleration will likely cap gains until the company can begin to perform.
Whatever happens we have profiled a number of stocks that are more likely to deliver big gains during the current rally phase than CSTR. Having said that, we remain intrigued by the story and will be watching when they report after the market on 8/4. We’ll see if they can begin to deliver on their promise.
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We Blew It On CSTR, Now What?
ReplyDeleteAccording to Yahoo Finance CSTR hadn’t beaten earnings estimates in at least a year. But more importantly CSTR hadn’t been able to translate their huge RedBox revenue gains into bottom line earnings acceleration. After last night’s report, that might be a thing of the past.
CSTR beat by 6c on the bottom line and $10MM on the top line. For the sixth straight quarter YOY sales gains exceeded 40%, but the key here is earnings acceleration, the lack of which had left us cautious on shares. The YOY gain was 53%.
For a company with as checkered an earnings history as CSTR that’s usually not enough. You need to see multiple quarters of acceleration. Given the market’s bullish posture, however, CSTR’s report last night combined with its raising of guidance just might do the trick.
They raised bottom line guidance by more than the beat in the quarter, hinting at the prospects of further upside. Meantime they projected sales acceleration in the high 30% range for the next two quarters.
What is most encouraging about the company’s prospects is that they understand Redbox is their driver. There were rumors last winter that they might spin it off but they are doing the intelligent thing and focusing on it, announcing that what they intend to spin off are the slower growing parts of the business like money transfer and other segments. This streamlining will somewhat dampen sales gains but boost profit.
With the company having recently announced partnerships with SNE to furnish product and Kroger to expand the pace of Redbox rollouts they are poised to increase their market share of industry rentals, which has grown from 2.3% in FY ’07, to 9.0% last year to 13.8% in the first half of this year.
When we suggested skipping the setup in CSTR’s shares a few weeks ago we said we needed to see the company deliver on their promises. Clearly they have.
That leaves us with the question of how to approach shares.
Besides the lack of earnings acceleration we suggested avoiding shares because they had corrected far more than other stocks in more bullish setups. But the market anticipated the earnings outperformance and since breaking out of the setup the stock has gained more than 37%, better than any of our other recommendations save STEC.
Did we miss the boat? Well clearly we passed on a superb trade. We suggested upside would be capped around $34 and the stock has run more than 10% beyond that to fresh 52 week highs.
But bear in mind our style of trading is not about buying low and selling high. We are by no means averse to taking a position in a stock at a lower price if it meets our criteria. But generally we prefer to buy strength. We’re not so much worried about missing CSTR’s move from $28 to $38. That’s the move that proves the stock’s mettle. What we focus on is the multiple expansion, the move to new highs and the run from $38 to significantly higher levels as the company’s idea proves out and it becomes part of the popular vernacular, with a burgeoning market cap as our reward.
Buying the stock here is a dicey situation. When stocks break out of cup bases without handles, as we have here, there is often considerable volatility at the break out point. There could well be a pullback forming a “high” handle above the previous highs. More importantly we are rather late in this particular market move. We’d be more adventurous in pursuing a straight cup break out if it had occurred in mid-June. There is likely to be less success for these types of aggressive entries now.
Finally, CSTR has a lagging Relative Strength line. That doesn’t mean the stock won’t or can’t go higher. It just signals that it is more likely to move higher slower than other plays. Of course, we’ve said that before and been wrong. But all things considered we’d await a consolidative phase in the market. That’s liable to allow CSTR to digest its recent gains while also allowing its RS line to “catch up.” Rest assured we’ll be visiting this opportunity again.
CSTR Not Yet Ready for Prime Time
ReplyDeleteToday’s price action in CSTR can only be termed disappointing. Yes, the market is selling off on high volume, threatening the market rally. But CSTR seems to be out front in taking the brunt of the selling whereas many leading stocks, at least as we approach mid-day, are down far more modestly and on light volume at that.
We were looking for a constructive consolidation to validate CSTR’s move off its recent bottom. Now it appears we will get a deeper move that could last weeks or months. That means CSTR is off our watch list for now but remains in our universe.
Recall we had been reluctant to endorse CSTR because of its lagging relative strength. We bring this up to underscore how important an indicator this is in judging a stock’s potential for future gains.
The market is likely pricing in fears over CSTR’s cost of product. They buy DVD’s from wholesalers and then rent them out for $1 a day. When the title is no longer in high demand they sell them to resellers.
While studios like Sony and Lionsgate have warmed to the idea many others see CSTR’s business model as a threat to their lucrative DVD sales. This seems as foolish to us as the music industry’s fight against music sharing. But in the meantime 20th Century Fox, Universal and now, today, Warner Bros, are proceeding with policies to prohibit CSTR from obtaining newly released DVD’s at wholesale prices for anywhere from 28 to 45 days from the date of release.
While this won’t impact CSTR’s ability to sell any title they want, in order to work around these restrictions they must buy the DVDs at retail. Despite analysts claiming this won’t greatly impact their margins, clearly the market is concerned.
CSTR has sued these companies and a ruling is expected soon. Should CSTR find its footing and put in a constructive base a situation would be set up where a favorable ruling could launch the stock into a significant run.
But that puts the cart before the horse. For now we’ll simply watch how CSTR trades over the coming weeks and track developments.