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Bull Of The Day: QuinStreet (QNST)

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QuinStreet (QNST - Free Report) is a Zacks Rank #1 (Strong Buy) and sports a growth style score of A.  That alone gets the stock on my radar screen but lately, I have been looking hunting some bears.  By that, I mean I am looking for stocks that have big short positions or at least have been attacked by the shorts.

Now I don't want to get too deep into why I want to hunt the bears, let's just say that the market conditions are ripe to force squeezes.  Usually, when you think of a stock under attack from the shorts you see a large short interest... something more than say 20% of the float.  With QNST, you don't really have that as only 6.4% of the float is sold short and the shorts have been covering.

Short Attack

The short attack came on April 11, when Kerrisdale Capital released a report that was critical of the company.  As much as I would like to go into the report and discuss which is right and wrong, the Bull of the Day article is not really about that.  This and other Bull of the Day articles are about how the stock became a Zacks Rank #1 (Strong Buy).

The report can be accessed here (https://www.kerrisdalecap.com/wp-content/uploads/2018/04/QuinStreet-Inc.-QNST.pdf) and it should be noted that the company was quick to answer the concerns raised.  In fact, the company guided revenues above the consensus the evening of the release of the report.

The stock was $11.58 down $0.74 just after the open on the day the short report and then closed at $10.14 down $2.18 for the day. But after the close guidance was raised with the company saying that the next quarter revenues would come in over $115M when the Wall Street consensus was at $91.1M.

The next day the stock recovered, but by April 25, the next earnings day, the stock was still below where it closed on April 10.

Recent Earnings

The April 25 earnings report saw the company top the Wall Street Estimate of $0.13 by $0.03.  The company reported revenue of $117.9M when the consensus was calling for $107M.

The company also guided FY18 to growth of 30% or more, which would be at least $390M compared to the $385M estimate.

The Zacks Rank

The Zacks Rank looks at the estimate revisions from all sell-side analysts that submit estimates to the Zacks Consesnsus.  The Rank gives you an idea of which estimate revisions are the best ones.  Earnings are a key fundamental driver of stock prices, so knowing where the estimates are headed is key.

Let's take a look at the estimates following the recent beat.

Estimate Revisions

Following the most recent beat, the estimate for the current quarter moved from $0.10 to $0.12.  That is a twenty percent move higher.

The current year estimate moved from $0.36 to $0.44 and over the last week or so kicked higher by another penny to $0.45.

The Zacks Consensus Estimate for 2019 moved from $0.48 to $0.56 over that same time horizon.

Valuation

This is where it all gets a little tough.  The valuation for QNST is pretty stiff, with a 45x forward earnings multiple.  The trailing multiple isn't any better with a 50x multiple.  The price to book of 4.57x is above the industry average of roughly 3.3x.  The price to sales multiple is 1.6x and that is well below the industry average of 2.3x.

Get Shorty

I mentioned at the start that the shorts have been covering.  The most recent short interest report shows that there are 2.35M shares sold short, but the previous reading was more than 2.56M.  THat 8% decrease suggests that the shorts might be giving up on this stock.  

My experience is that once the shorts lock on to an idea, they tend to circle back at a later date.  If QNST continues to beat the number and show solid revenue growth, the shorts will continue to help the stock move higher as they cover.

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