The house rules are simple in this weekly column.

  • I bash a stock that I think is heading lower.
  • I offset the sting by recommending three stocks as portfolio replacements.

Who gets tossed out this week? Come on down, Coinstar (Nasdaq: CSTR).

Almost done with the 10th chapter

Shares of Coinstar jumped higher yesterday, backed by a favorable Barron's write-up over the weekend.

The parent company of Redbox is growing its $0.99-a-day DVD-spewing kiosks at a heady clip, and that's helping offset the stagnation of the company's namesake business of turning spare change into store credit and third-party gift certificates.

DVD-based revenue soared 44% in Coinstar's latest quarter and now accounts for nearly 80% of the company's revenue. The past few weeks have delivered more good news. It will soon begin renting Blu-ray discs -- at a higher $1.50 nightly price point. Its army of 23,000 automated kiosks will also keep growing, spearheaded by a recent deal to expand into CVS/Caremark (NYSE: CVS) pharmacy locations.

It's clear that Redbox's popularity is eating into Blockbuster and other traditional movie rental chains. However, that allure is fading. A recent agreement with several movie studios to delay Redbox availability for 28 days may improve its inventory costs, but it's going to force movie buffs to go back to the video store or rely on pay-per-view for the hottest titles.

Barron's paints a rosy picture of the Redbox model. The kiosks cost just $15,000 apiece, and they're stocked with as many as 600 individual discs. They are cheap to maintain, and retail hosts only take a roughly 15% cut of the action. By the third year, a Redbox kiosk is raking in an annual average of $50,000 in revenue.

The rub here is that CEO Paul Davis naively tells Barron's that he believes his company has pricing elasticity and that DVDs will be popular for "many" years. He also sees enough retail room to more than double to 50,000 kiosks, but he may be underestimating NCR (NYSE: NCR), which can easily cut into market share.

The ATM maker has opened thousands of Blockbuster Express kiosks. Don't let the feeble economic state of Blockbuster worry you. NCR can always license a new brand or roll its own.

Redbox has been able to post some huge gains as it expands quickly and takes advantage of shuttering video stores and its attractive value proposition. That will pass, and the streaming revolution is coming quickly.

Digital delivery is real. Redbox promises to pull the wraps off a digital distribution strategy in two months. It's too little, too late. As it stands, Coinstar is too expensive at 24 times this year's projected earnings when its model is a ticking time bomb.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.

  • Best Buy (NYSE: BBY): This week only, Best Buy is offering $0.99 rentals -- including new releases Date Night and The Bounty Hunter -- through its recently acquired CinemaNow streaming service. Take that, Redbox! Streaming into Web-tethered televisions without the rush to beat the clock before that 9 p.m. cutoff turns a buck rental into a $2 bill? Sweet. Even if it's only a one-week sale to get noticed, it does set a precedent. Beyond CinemaNow, Best Buy still has choice seats for the digital revolution. Sure, it may not sell as many DVDs as it used to, but the consumer electronics giant will be the top choice for home theater systems, set-top devices, and Internet routers to facilitate the migration.
  • Netflix (Nasdaq: NFLX): If Coinstar is expensive, Netflix is outrageously expensive. The difference here is that Netflix is worth it. With 15 million subscribers onboard -- and more than 9 million as active streamers -- Netflix is leading the way toward optical disc extinction.
  • Google (Nasdaq: GOOG): Forget this week's buzz about a Hulu IPO, Google's YouTube remains the runaway leader in video streams. Google is also the world's leader in online advertising and is launching Google TV -- through Best Buy, no less -- later this year. Connect the dots. Google is going to be a big player in the realm of online video. I'm mildly optimistic that Apple (Nasdaq: AAPL) will finally make its Apple TV appliance stick if the rumored $99 price point and iOS platform chatter is true, but Apple has dropped the ball in digital video by sticking to its piecemeal rentals and purchases. Google has yet to face-plant. I like its chances here. I also dig how Google is trading at a much cheaper earnings multiple than a doomed Coinstar.

I'm sorry, Coinstar. Your future is a smudged disc.

Best Buy and Google are Motley Fool Inside Value picks. Google is a Motley Fool Rule Breakers recommendation. Apple, Best Buy, and Netflix are Motley Fool Stock Advisor choices. Motley Fool Options has recommended a bull call spread position on Best Buy. The Fool owns shares of Best Buy and Google. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz is waiting for a Redbox kiosk that sells microwaveable popcorn with its discs. He does not own any of the stocks in this story, except for Netflix. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.