Trade of the Day: Stamps.com (STMP)

by John Jagerson and Wade Hansen | April 2, 2014 10:25 am

Stamps.com (STMP[1]) has been a survivor. Initially the company was caught up in the dot-com rally of the late ‘90s when the company planned an IPO with literally no revenue. Not just losses — no topline revenue at all. At the time, we remember thinking that the company would never be successful because it was dependent on getting a licensing deal from the U.S. postal service, which seemed unlikely.

However, eventually the license was granted and, after a precipitous drop from $190 to $3 per share following the recession of the early 2000s, the company reemerged as a mini shipping powerhouse. In many ways, the company flies under the investing radar compared to competitors like Pitney Bowes (PBI[2]) and Newell Rubbermaid (RBI[3]; yes, Rubbermaid sells online postage services). Although STMP’s stock is volatile we think it has become undervalued again in the short term.

STMP’s service allows companies and individuals to print postage for packages or letters locally rather than at the post office. The bulk of this shipping is done via its PC Postage product lines and a small fraction through the PhotoStamps programs. The firm really took off in 2010-2011 as it completed deals with Amazon (AMZN[4]) and eBay (EBAY[5]). The relationship with EBAY, in combination with the USPS, has been particularly productive and the stock more than quintupled in price to its recent high near $50 per share.

These old Internet/IPO companies have their ups and downs and investors in STMP are a very fickle bunch. Growth expectations slowed in late 2013 and the stock dropped again following their February earnings report. However, from a technical perspective, the drop took STMP to a likely support level based on the major highs formed in 2011-2012.

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As you can see in the chart above, Stamps.com is bouncing higher from its horizontal support level while support from its trend-line and the 200-moving average lurk just beneath at $31 per share. If the stock is going to bounce higher, this is where we would expect that to happen. Since the earnings-decline in February, buying volume has outpaced selling despite some mild, continuing losses. That volume pattern indicates that larger investors are accumulating the stock at this level from ‘weaker hands’.

A selloff like we saw in February can present interesting buying opportunities depending on the cause of the selling. According to the report, Stamps.com’s growth was still strong, there were a record number of subscribers, and management was moving away from a less profitable business line. The real issue was that the outlook for 2014 came in at the lower end of expectations. “Guidance” surprises like this can have a negative impact on any stock – STMP was no exception.

The question at this point is whether Stamps.com’s management is right about its future predictions? Certainly it has better information about its own business than we do, but guidance in this case was based on the outlook for economic growth in the U.S. in 2014. That is a much more difficult thing to predict. Like many other companies, we think STMP’s management was sandbagging its estimates this quarter.

Two of STMP’s big partners, AMZN and EBAY, have also been pulling back to their respective support levels recently. Stamps.com’s management team apparently isn’t alone in its estimates for the future. To a great extent, STMP’s future performance is tied to the sales growth at these firms. However, we think that both of these companies (who are tentatively scheduled to release earnings before STMP does) are also oversold and could easily provide a catalyst for additional upside.

Retail and internet sales volume is mean-reverting, and tends to oscillate between two extremes. We feel that the technicals and accumulation signals are pointing to a likely upward reversion toward the mean over the next few months. If that is the case, we like Stamps.com as a bullish trade because of its relatively more attractive fundamental performance and value metrics.

Our Recommendation

We recommend opening a long position here at current levels with stop losses placed below trendline support at $30 per share. Option traders may want to use calls as an alternative to an outright long position but we would urge caution before opening a trade like that. Stamps.com has a very thin chain-sheet and the bid-ask spread is fairly wide. That could make it costly to open the position and difficult to exit if the stock drops.

InvestorPlace advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader[7], a trading service designed to help you make options profits by trading the news.  Get in on the next trade and get 1 free month today by clicking here[8].

Follow John Jagerson[9] and Wade Hansen[10] at Google+!

 

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