The Cult Stock Pattern: Is This Stock Now a Buy?

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Outerwall Inc (NASDAQ:OUTR) is currently at about $48, down significantly from its 2012 high of more than $70. It recently plummeted after it lowered its guidance; the company is now forecasting full-year revenue of $2.3 billion and earnings of $4.92 per share. While both figures are significantly lower than expectations, they still represent year-over-year growth.

Moreover, if we use the company’s new guidance, the stock now trades at 0.5 times guided sales and nine times earnings. Both metrics suggest value, and because of its cheapness, the stock has the possibility to recover from its large fall.

With that said, it is hard to draw a positive from Outerwall Inc (NASDAQ:OUTR)’s recent guidance. Thus pessimism is likely to follow the stock for some time. However, once the negativity dies down, I’d watch the stock closely and expect a second rally.

Final thoughts
While most investors consider themselves fundamentalists or technical traders, the best investors realize that both disciplines must be respected, along with the psychological trade of the market.

Retail investors often overcomplicate their analysis and forget the basics of investing. One of these basics is that valuation is dependent upon expectations, meaning that a company’s valuation will fluctuate until expectations align with fundamental performance. When expectations exceed fundamentals, a stock falls, but when fundamentals exceed expectations, a stock rises.

Now, Outerwall Inc (NASDAQ:OUTR) has set its expectations ultra-low, therefore the stock has fallen. With a cheap valuation and a low bar, however, this is a company that could rebound nicely over the next year. In a market that’s trading near all-time highs, this is a value play that you may want to explore.

The article The Cult Stock Pattern: Is This Stock Now a Buy? originally appeared on Fool.com and is written by Brian Nichols.

Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters and Netflix. The Motley Fool owns shares of Netflix.

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