by John Jagerson | November 18, 2011 12:21 pm
Next time you’re in a convenience store, take a close look at the small free-standing ATM near the door. Maybe hang out a little while and “enjoy” a hotdog or bag of chips so you can take a close look at who’s using those machines and how often. You may learn something that can make you some real money.
Those little cash machines are currently churning out big profits for shareholders of Cardtronics (NASDAQ:CATM). If you ever wondered who’s willing to pay the “big fees” for withdrawing money from these machines, you may want to take a long look at the debit card in your wallet. Cash machine companies are offering low-cost or no-fee products to consumers that could knock debit cards off their perch as the leading way to pay for retail transactions.
The market for this kind of access to cash is large, profitable and growing, and the biggest player in this part of the “fringe-banking” sector is Cardtronics — our pick for buyers looking for growth in today’s market. In the near term we expect investors to push into the stock partially because of all the bad news coming from the big debit card issuers like Bank of America (NYSE:BAC).
Although it seems that the big card issuers are backing away from some of the recent fee increases, they’re actually just pushing those debit card charges into less obvious places. For example, if you need to replace a lost card, BofA will now charge you $20 to get one quickly. We don’t expect this kind of thing will fool consumers for very long.
Cash is a close second to the most popular way to pay for retail transactions, and if debit cards are cost-prohibitive, ATMs become even more important to consumers. CATM not only operates the largest ATM network in the U.S., it also has products consumers can use for no-fee access to ATMs around the country. These days the adage of “cash is king” has never been truer.
The stock popped nicely on third-quarter earnings earlier this month and has since consolidated into a classic pennant formation. In the chart below, you can see what the stock looks like right now and where we would expect prices to go in the near term if we get the breakout to the upside we’re expecting. Our short-term target would net investors 23%, and it could be much more if momentum takes the stock further.
Click to EnlargeThe technicals and fundamentals for this stock look good, and growth prospects are high in the short term. If you’re looking for a way to turn the missteps and bad news of the traditional banking industry to your advantage you might want to look at CATM, which is steadily emerging as the more attractive alternative for consumer payments.
CATM is a small-cap stock with a thinly traded chain sheet. That isn’t a reason not to buy a call option, but it does change how the trade is set up. In a situation like this, we recommend looking at the longer-term expirations and using a limit order to split the bid/ask spread.
For example, the March 2012, 25 strike calls traded on Thursday in between the bid/ask at $3.20 per share. This creates a lot of leverage that could seriously ramp up gains if the stock rallies in the short term. Use a limit order to make a trade like this, and be prepared to wait an hour or two for your order to be filled.
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