FindProfit covers The (KNOT)

May.17.05 | About: XO Group (XOXO) (subscription required) sent an alert to clients May 9th advising them to cover their short position in The (ticker: KNOT). It said:

ALERT: Aggressive Growth Portfolio Covers The Knot (KNOT)
Editors 5/9/05 2:45 PM

Booking our quick 27% gain on this short and stepping to the sidelines ahead of earnings report.

At 2:45 PM today, we "covered" our short in The Knot (KNOT) by buying 900 shares of KNOT at $6.83 per share for the "high risk, high return" Aggressive Growth model portfolio.

At the time of the "cover", KNOT's bid was $6.76 and ask was $6.83. It is our policy to make any purchases (including short "covers") at the ask price, and any sales (including shorts) at the bid price. A short sale is when you bet that the price of a stock will decline by borrowing shares from your broker and selling those shares on the open market, in the hope that you can repay your broker later by re-purchasing those shares at a lower price (allowing you to pocket the difference).

The 900 shares of KNOT cost $6,162.00 to cover (including a $15 commission fee), versus our initial short proceeds of $8,436.00. The gain on this position after $30 in commissions ($15 each way) is $2,274.00, or ~27%.

** Why Cover Our Short of The Knot (KNOT)!? **

Since shorting shares of The Knot (KNOT) at the $9.39 level in early April, the stock has quietly declined over -25% as it heads into its Q1 earnings report on Wednesday.

KNOT shares leapt higher in late March on a combination of the company being re-listed on the Nasdaq and a bullish mention in Business Week magazine. We've kept tabs on the online wedding media company on and off for a few years, and after doing updated due diligence on the name, we concluded that the stock had become significantly overvalued relative to its long-term growth rate and underlying fundamentals. We also noted that KNOT management hadn't executed cleanly to date and that the stock was susceptible to a sizeable pullback if the company ran into some typical "growth bumps."

The news flow out of KNOT over the past month has been quiet, except for the emergence of some small selling on the open market by long time KNOT backer, Hummer Winblad. The KNOT also recently filed a registration for the venture capitalist to sell more than 2.4 million shares of the company that it still owns. We believe this selling and registration has recently been weighing on the stock and is an interesting indication of what long time KNOT insiders think of the stock at these valuation levels.

KNOT shares opened the year at the $5 level and were trading at just $3.50 per share last October. With KNOT's decline over the past month, the stock has traded back down to around the $7 level or about where it was ahead of the Nazz re-listing and BW mention. Our valuation work has suggested that KNOT is worth $6.50 in a "best case" and more like $5.50 using more realistic revenue growth and margin assumptions for this year.

Using the most optimistic 2006 earnings estimate for KNOT that we've seen (46 cents pre-tax), the name is now trading for 22.5x 2006 after-tax earnings and 30x our best case 2005 after-tax earnings estimate of ~22 cents. KNOT hasn't been providing any guidance.

While we don't want to cover our KNOT short too soon, with the stock now close to this "best case" valuation and earnings on tap for Wednesday morning, we like locking in our quick gains and moving to the sidelines. We don't believe KNOT has a monster Q1 in the cards, but the company is likely to point to a rosy picture for 2005 and talk up a variety of new and expanding partnerships. We're not enthralled by KNOT's management team, but as we said in our original short write-up, KNOT is a solid business that should be able to accelerate its profitability as it scales. This is not a "broken" business or troubled name.

With this in mind, we think the smart move today is to book our nice 27% gain on this short, step to the sidelines and see what kind of visibility KNOT provides into the rest of the year. We're certainly not against re-shorting the name on strength in the future if we see another compelling shortside opportunity emerge. We'll keep you posted as always.

Thanks for the gains, KNOT!

KNOT chart below.