BUY Recommendation-Rosetta Stone-RST-$12.62

Rosetta Stone Inc. (NYSE-RST)Valuation-$31.14
Price March 2, 2011-$12.62

Whoa! A NY Stock Exchange listed stock for us? Can’t be.

We have been struggling to find some compelling valuations and have been having little luck.

RST is a much more high profile stock than we usually recommend for sure. But with their disappointing earnings release this week, the stock has plunged to less than 50% of what our valuation model indicates. So we are taking the bait even though this high profile stock will be buffeted by a lot of institutional buying and selling.

The company has $5.75 a share in cash, about $240 million a year in sales and is profitable. Gross margins are in the 80% range. For 2011 they are projecting sales to increase from the $258 million in 2010, but lower profit ($.63 a share for 2010). Our valuation is based on $240 million in sales and no profit.

RST is trading at only 40% of our valuation. If it gets to just 60% of our valuation we have a 48% gain.

Average trading volume is only about 220,000 shares a day.

About Rosetta Stone

Rosetta Stone Inc. is changing the way the world learns languages. Rosetta Stone provides interactive solutions that are acclaimed for the speed and power to unlock the natural language-learning ability in everyone. Available in more than 30 languages, Rosetta Stone language-learning solutions are used by schools, organizations and millions of individuals in over 150 countries throughout the world. The company was founded in 1992 on the core beliefs that learning a language should be natural and instinctive and that interactive technology can replicate and activate the immersion method powerfully for learners of any age. The company is based in Arlington, Va.

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