RST (Range)...

RST, makers of Rosetta Stone language teaching software, had some news today the market didn't like, and the market took it down 27%. Long story short, RST did two bad things today. One, they revised their 09Q3 guidance far lower, citing higher than expected operating costs for the quarter due to sales/marketing costs and product development costs. This comes immediately following a raise in guidance after their last earnings report a couple weeks ago. Two, they cancelled their upcoming equity offering.

Fundamentally, I'm torn on this company. On one hand, they have solid revenue growth and a solid balance sheet with a highly effective product, but on the other hand, they are a 'one-trick pony' of a company in that they really only have that one product and not much else. Frankly, I would not be surprised to see RST acquired by a larger publisher eventually, but it's not exactly cheap on many valuation measues such as price/book, sales, or earnings.

With today's massive breakdown, there's a lot of underwater shareholders who would likely take strength as a chance to get out and minimize their losses. On the other hand, we saw the lows of the day hold right at round number $20, indicating there are buyers willing to get into this name here around $20. My expectation is RST will trade in a range between today's highs and lows, roughly $20-$24, for several weeks. It doesn't report again until mid October, so we'll look to play this one by trading the range, buying/covering at $20 and selling/shorting at $24 until the range is resolved one way or the other. I like range-bound trades like this, and this is a big range to work in.

We'll revisit it once either $20 fails to act as support or $24 fails to act as resistance.



Position: none