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Sell It and Forget It - RST - An Eventual Single Digit Midget

|Includes: Rosetta Stone Inc. (RST)

RST…a name that should be hit on any spikes up. I, personally, would think of it as a gift if some weak handed shorts and overeager longs drove the stock back into the 20’s. If a borrow became available (this is a very difficult borrow), it should be taken in the low 20’s and especially taken in the mid-20’s. Good luck with the latter scenario, however, as this company may find itself in the single digits sooner rather than later due to the following issues:

#1 – Pricing – this is a company that charges some hefty fees for their language software. There is no question that their software works. The question is, what is it worth to people in this type of economic environment? Yes, corporations and government agencies that have money to burn will be willing to shell out the money for pricey software such as this. However, the company is trying to hit the individual consumer market and with its steep price tag…it is failing.

#2 – Advertising Expense – their advertising expenses are substantial. Nothing wrong with advertising if you are getting a return on your funds. Rosetta Stone, thus far, has not.

# 3 – Piracy – the company has been going through efforts to control piracy, as their software is available for download on the net at a cost of nothing…zip…zero. That leaves a struggling college student with a very appealing way to save $300. It may be unethical, but in the end, it’s one more way Rosetta Stone eats dirt.  

# 4 – Cheap Competition – there are numerous competitors selling comparable software for a fraction of the cost. Go into any Best Buy and you will see this very evident on the store shelves. No, they don’t have the brand name or the fancy yellow box, but they work. Again, this leaves Rosetta Stone with her panties in a twist.

# 5 – Economically Sensitive – $300 software that helps you impress your friends when your ordering spaghetti at your favorite Italian restaurant is cool when your home is appreciating 20% per year and your stock portfolio is doing the same. However, when you are underwater on your home and your stocks have been flat for the past 10 years, then it’s not so cool anymore. Most people will then choose to get by the old fashioned way…ordering in English.

# 6 – Prices Going Up – you would think that Rosetta Stone would combat their falling stock price by being proactive in the marketplace. Not through increased advertising or raising prices to increase margins…but by being more competitive and economically aware by actually lowering prices. You don’t create demand by selling a $10,000 car that has been sitting in a used car lot for 6 months for $25,000…instead you bring the price down to a level that the market demands. Rosetta Stone has been engaged in the opposite.

# 7 – Controlled By Short Sellers – it is fair to say that this stock doesn’t have a fighting chance versus all of the professional short sellers in the stock at present. I have seen IPO’s similar to this get swarmed by short sellers in the past. It is similar to a wildlife documentary, where you have a herd of lions pouncing on a baby gazelle…the baby gazelle doesn’t have a chance to get away, and it’s not a matter of if but when, the poor animal will succumb to the attack. RST has the same fate, as I can’t see there being enough buying pressure to force shorts out of this in any substantial way.

# 8 – Technically Brrrrokkken – technically this chart is as bad as it gets. It hasn’t had a chance since debuting in April of last year. All the heavy volume days come on down days. Volume rarely picks up on up days or a series of up days. The gap down in August of last year on heavy volume was technically devastating. It seems the stock lacks buying pressure in any substantial shape to push the shorts away. It would take a fundamental miracle for this name to generate the buying power needed to resurrect itself in any substantial way going forward.

If a borrow becomes available at higher prices, I will be all over RST. As mentioned in the chart, watch for volume. If there is a sudden increase in volume to the upside, it may be a warning sign that a change in momentum is coming…I would then reconsider. However, a weak move up based on higher general equity prices, would be the ideal scenario for adding this to a healthy portfolio of short positions.

As with all trades, should I take a position in this name, it will be posted here first.

Day 24….I can learn a foreign language without the help of Rosetta Stone…Dr. Kellegro.

Disclosure: None