Load Up On Coins (and DVDs) with Coinstar (CSTR)

Only a few stocks are worth a smart investor’s attention. In this market, where weekly swings instill weekly fears, it’s more important than ever to be selective. That’s one of the reasons we’ve been careful about recommending equities. With ETFs, at least your risk is usually spread out over several companies, possibly even industries. But you need a laser-focus to pick stocks in this market.

That’s what we did in February with Netflix (NFLX). On 2/26, the day following our recommendation, NFLX closed at $35.78. Today NFLX closed at $44.28, a +23.8% gain in only six weeks! (Today’s pick, CSTR, rose +20.7% in the same period, also outpacing the S&P 500 gain of +9.1%).

Fundamentals along with a rising market gave our pick a big boost. Laser-focused stock selection in the prevailing “Frugalpalooza” environment made that pick possible. We think we have another one on tap for you. Now could be your chance to pick up Coinstar (CSTR) at a bargain.

There are three reasons why we think CSTR could be the next NFLX.

First, it’s a consumer-savvy play. Much like Netflix, CSTR is built on perennial consumer-driven services. Their flagship Coinstar machine turns idle change into cash. For every dollar consumers drop into the grate, Coinstar makes $0.089. It may not seem like much, but this simple idea grew CSTR from an idea in 1992, to a $912 million company last year. In addition, they have diversified their offering with prepaid phones, global money transfers, and other financial services. This year they finished buying another winning idea – the “Redbox” video-rental machine.

This brings us to the second reason you should consider Coinstar: their penchant for strategic acquisitions. Redbox was a great buy. It seems consumers are more likely to pay the now-ubiquitous Redbox $1 per night, than fork over $5 to Blockbuster for the same movie. With kiosks located at McDonald’s, Walmart, and Walgreens, Redbox has earned a 9% market share of the overall DVD rental market. There’s still much to grab from the high-overhead, traditional video stores as they plan to install 20,000 Redboxes by the end of the year.

The third reason to load up on CSTR is the nature of their business. It takes time to build relationships with the nation’s largest retailers. But over time, Coinstar has ensconced themselves as a self-service giant. They built their services over years of testing and sales. Instead of taking up floor space, they actually drive more traffic into stores. This creates a win-win relationship with Safeway, Walgreens, or Walmart. Coinstar’s diversified product line is almost as stable as the host business itself.

Coinstar has been on a tear in recent weeks. When they announced the Redbox deal, CSTR jumped in expectation of continued DVD rental growth. Timing your entry will be key on this one. Coinstar shares have pulled back this month, and we expect it to offer an opportunistic entry point. Consider placing a limit-buy order around $29 a share. It may take a few days for your fill, but it will be worth it if CSTR takes off again. To go with a recession-resistant, consumer play in a shaky market, buy CSTR.

CSTR