This post will not be an actionable one, but is more about how there are investment opportunities right in front of us. I will try to incorporate some present analysis near the end, but this is mostly to give an insight into my process, methodology, and maybe help some of you find some opportunities of your own.
About two and a half years ago before I had opened and funded a brokerage account, I was teaching myself the ropes. I was learning how the stock market worked, and what factors made the stock price move. I focused on fundamentals at first, but I was more interested in how a company worked and the impact its products or processes had on its health and success. At this point I was probably a Netflix (NFLX) subscriber for over 4 years. I did not know much about NFLX at the time, I just thought it was a great service. Missed an opportunity to invest in the great idea and make some nice gains.
It was only later that I came to know that at the time NFLX was one of those hot growth stocks, eventually reaching dizzying highs that wanted to reach $300, though the price never got that high. Now it is back around $65 just a bit above the $55 from around the beginning of this story, let that be a lesson about the pitfalls of the buy and hold strategy. Lots of factors played into NFLX’s downturn, primarily the actions of the company itself.
I was walking out of my local supermarket having rented a movie from the RedBox. I am sure many of you recognize the RedBox, where you can get new and almost new movies for $1 a night with an additional $1 for every night you keep it longer. That is a fantastic deal because it’s not punitive. And you have the convenience of getting your movie right away.
I asked myself the question “I am a Netflix subscriber, why did I get this movie from RedBox?” The answer was convenience. The next question was “Why do I even have Netflix?” The answer was that I’m a bit of a movie buff and I like B-movies and foreign movies that would not be in RedBox. Not a lot of people I know like movies nearly that much, so I thought there was something there.
Then I discovered that RedBox is owned by Coinstar (CSTR). I remember those green coinstar machines, they charge you through the nose. Where I live they are not used very often, but I knew that in the American South there were sometimes lines to use those machines. I researched CSTR and found that their core business of sorting coins and charging an outlandish percentile was profitable and high margin. RedBox was part of their growth strategy. By the time of my research RedBox was both the engine of their growth and the lion’s share of their profits. I was using RedBox pretty regularly, it was far cheaper than Netflix, and carried all the newest movies. If you lived near a supermarket, watched a movie once a week with your family, and only chose new movies, then it was perfect for you! I expected RedBox to grow in popularity. And at the time they were first, now I see Blockbuster boxes, but RedBox was still first, and so very cheap.
So CSTR has a profitable, high-margin core business, with a rapidly growing extremely profitable new business. That smelled like a great opportunity to me. At the time CSTR was trading at $33, this was one of my first trades. Sometime had passed since I had gotten my RedBox movie. I think had gotten 14 shares. Now I didn’t hold for the double, I think I sold at $36. Impatience, the folly of youth.
Had I more money I would have bought NFLX too. In the long-term, I was more comfortable with CSTR’s approach. They profited on convenience and flew under the radar, at least compared to NFLX. Later on they would play ball with the studios, which NFLX did not.
I had certain thoughts when NFLX announced its streaming service. I might have seen the decline coming, but hindsight is almost worthless. However, we can look for those signs with other companies and see if they are headed down the same bungled road.
Now something that might be actionable. CSTR grows at a steady pace, their business is quite boring. RedBox is a movie vending machine. The original green machine is a strong-box with a coin sorter attached to a computer. I expect CSTR to be a cash machine into the medium term, but not a growth story. They are very likely to issue a dividend. I have not refreshed my knowledge of CSTR as of late and this might already be in the works, maybe once the economy starts improving.
One thing regarding CSTR I am interested in is whether revenue in this core coin business increased when the economy got worse. Did cash-strapped families cash in their coin hoards to make ends meet? I myself once used a CSTR machine for all my unwanted change and got $150 for my effort.
Next time, I will do some real analysis. I might do GLW or GLD. Possibly both. On a longer scale I will provide more in depth articles on ALU and S. There will also be some lessons, and more methodology articles.
Article Tickers: $CSTR $NFLX