Last Friday, I revealed that
investor sentiment has hit new lows
But merely feeling glum about the stock market is one thing.
Actually doing something about the situation can totally change the
And that's exactly what's happening.
The latest reports from the New York Stock Exchange and Nasdaq
reveal that investors increased their bearish bets during the last
two weeks of May.
Specifically, short interest on the NYSE rose by 2.17%, with a
3.41% climb on the Nasdaq - big moves for a two-week period.
Remember, investors who sell stocks short seek to profit from
falling share prices. They borrow shares, then sell them to a buyer
right away, hoping to buy them back later at a cheaper price to
pocket the difference. It's essentially a long stock purchase in
Here's what confounds me about the latest short interest data,
though: Investors are betting against companies with rock-solid
Like this one, for example…
Profiting From Pocket Change
Based on short interest as a percentage of the float (i.e.
shares available for trading),
(Nasdaq: CSTR) is the second most shorted stock in the entire
S&P 1500 index (which includes all stocks in the S&P400,
500 and 600 indexes).
A staggering 39% of Coinstar's available shares are currently
shorted, compared to just 6.3% for the average stock in the S&P
Yet the company boasts some of the strongest growth fundamentals
in the market.
You're probably familiar with one of Coinstar's two business
segments - the company's network of 19,000 coin-counting machines
in supermarkets and other retail outlets across North America.
Consumers dump their change into a sorting basket, the machine
counts it and then spits out a voucher, which is redeemed for cash
at the nearest register.
It's not free, of course. Coinstar charges a 9.8% convenience
fee in the United States and 11.9% in Canada. However, consumers
can avoid the fee by converting their coins into gift certificates
instead of cash at the machines. And they're redeemable at popular
(Nasdaq: SBUX) and
Movie Night at Redbox
While Coinstar's change-counting machines are pretty familiar to
most people, what you might not know is that Coinstar also operates
the largest network of self-service DVD rental kiosks - Redbox.
Instead of shelling out $12 for a movie ticket, consumers can
pay $1 a night at any of the company's 30,000 Redbox kiosks located
at retail outlets across the country.
Each machine holds 200 titles (with multiple copies) at a time,
almost all of which were released in the last six months.
And let me tell you… the business of pocket change and cheap
Strong… and Getting Stronger
In the last quarter, Coinstar's revenue blasted 31% higher - to
$424 million. As a result, profit jumped by 53% and margins
fattened. Coinstar also managed to increase its market share.
Such enviable results aren't a fluke, either.
In the coming year, analysts expect Coinstar to grow its sales
and earnings by 25.7% and 48.3%, respectively.
And according to my analysis, that's conservative, given its
continued market penetration and growth initiatives. For
- It just landed a deal to install its coin-counting machines
in the 1,400 Safeway stores in the United States and Canada.
- This month, the company's also adding video game rentals to
its Redbox kiosks.
So why in the world would investors bet against such a solid
company? Especially since its business would prosper, even if the
economy sours again.
Given that the underlying business fundamentals are so strong,
investors must be betting against the stock because it's obscenely
overpriced - just like
(Nasdaq: OPEN) was back in February - right?
When Bears Become Bozos
On a historical basis, Coinstar is reasonably priced, trading at
about 30 times earnings. That's hardly frothy. Not when you
consider that its profits are expected to grow three times as much
as the average stock in the S&P 500 this year.
And on a forward-looking basis, the massive amount of short
interest is even more confusing. Coinstar trades for just 13 times
forward earnings, right in line with the average for the S&P
Bottom line: If you're feeling bearish because of the
underwhelming macro-economic picture - and decide to act on it -
stick to shorting fundamentally flawed companies, not strong ones
And if you want truly actionable advice, consider going long
Coinstar. As the company continues to post impressive results,
shares could see a massive short squeeze, as all the foolish bears
rush for the exits and buy to cover their positions.
Top Buy and Sell Ideas Based on Last Week's Biggest
Gainers (Part 1)