Earnings Will Sink Blue Nile's Stock

I woke up this morning and went cruising in search of the next BIDU, i.e. a stock with growth but an insanely high P/E that is too high for the earnings growth. Instead, I found a stock that has zero or negative growth and still an insanely high P/E.

Pull up a 2 year chart of NILE showing the rolling EPS. You will see yearly EPS of $0.70 - $1.00. You will also notice that when their trailing EPS was $1.00 the stock traded between $20 and $55 a share.

Now their trailing 12 month EPS is $0.71 a share and they are trading at $65.75 a nice multiple of 92 times earnings.

So if you ask Jesse Livermore or any other trend follower, they will look at the chart and say this is a nice buy, which is great, but what happens when earnings come out on November 5th?

A few reasons being tossed around as to why this stock has moved up so much:

1. People are comparing this stock to AMZN. However, AMZN is like Visa (V) & Mastercard (MA), they are more of a payment processor / middleman than an online retailer.
2. The stock has a 20% short interest. That does not bother me because short squeezes rarely happen. Smart money short stocks and smart money is usually correct.
3. Thinly Traded. Because the stock is thinly traded it is easily manipulated. See LNN, a stock where the market maker is the analyst too and upgrades it to outperform.
4. People believe that the consumer is going to start spending again. That is great but it does not translate into earnings for Blue Nile. The recession creates babies, not weddings.
5. Every guy that bought a ring online thought it is such a great company so they decided to buy a few shares. Kind of like the people that own Starbucks from $40 a share.

In conclusion, I think NILE between $17.50 and $25.00 could be something to consider buying.

The only way I would consider it a buy at those prices would be if earnings increased to $1.25 a year.

I plan on having a short position in NILE before they release earnings on November 5th.

Disclosure: I currently hold no position in NILE.

Comments

[Stock Yid:]

I just spoke with my broker and he said they will not be lisiting new options on NILE because it is going to be delisted due to its low share count. Not sure what this all means...

Oct 27 11:05 AM

[Stuckinamobile:]

You are correct. This is a manipulated stock. The float is locked down and funds and institutional holder control the bid and ask and the price most of ever single trading day. Today was an odd exception as the bid and ask responded normally and was not bid up like on most trading days. They do this when they need more shorts to squeeze. I have tracket this stock for over two years. It went from 18 in February to 65 in October. Remember....they sell jewerly in one of the worst recessions ever. Think rational here.

Don

Oct 27 10:12 PM

[ukdaytrader:]

This is great and you are absoutely right. Even ignoring the P/E ratio looking at EBITDA was a mere $18m dollars in 2008 and $24m in 2007, so how this achieves a valuation of $915m for the company is anyones guess. The way to play these type of stocks and we have quite a few in the UK, is to short just sufficient that if the price moves against you by 30% you won't feel it. This way you can hold until the price reflects the true value and any market manipulation wont get you closed out. Unfortuantely you cannot make huge amounts unless you have nerves of steel to ride out the manipulation.

Oct 28 10:56 AM

[ozymandias888:]

NILE is where shorts go to die.

Which is not the same as saying its a good stock or a good company.

Oct 28 04:58 PM

[Joe Friday:]

This is indeed a highly manipulated stock. It does not trade on valuation. Nobody in the market could possibly justify the purchase of this stock on any valuation metric (which begs the question...why are the institutions holding it?)
The key here is float analysis. The total share issuance is 14M.

According to Yahoo, 126% of all the shares outstanding are held by institutions and 3% are held by insiders finance.yahoo.com/q/mh.... I am not sure how this is possible, and it may not be entirely accurate, but it helps explain the manipulation. There is virtually no truly free float for the retail investors.
The total number of shorted shares is now 2.7M. But, it is important to note that during the run from 20 in March to 66 last week, the short position declined from 6M to 2.7M. With the float as tightly tied up as it has been, each bump in price has caused more and more weak shorts to cover (margin calls), and it has been hard to borrow, adding more short squeeze fuel. The short squeezes combined with the tight float has forced the price higher and higher. If you watch the trading in this stock you will note a tendency to have it run up in the early trading based on the margin calls and borrow calls from the previous day.
The tight float is indeed a two edged sword, however. Any large holder that trys to exit will drive this down very quickly. Nobody reallly beleives this stock is "worth" 65. The question the institutions need to grapple with is how do they exit and get their hands on the mirage value. In addition, the 3M shares that have covered are all waiting on the sidelines hoping to get in for the ride down...Any combination of selling of any size from those burned shorts or any one institution that trys to exit will burst the balloon.
The question is when will that happen, and can the shorts still holding wait until it does.

"the market can remain irrational longer than you can remain solvent" .. I believe the quote is attributed to Bernard Baruch.

Oct 29 09:53 AM

[ukdaytrader:]

Well here is the list of the "muppet" fund managers that own the stock......lets hope they won't be getting a bonus this year.

MORGAN STANLEY INST FD INC-SMALL COMPANY GROWTH PORT
AMERICAN FDS INSURANCE SER-GROWTH FD
SMALLCAP WORLD FUND
BARON GROWTH FUND
FIDELITY MID-CAP STOCK FUND
EVERGREEN OMEGA FUND
Columbia Fds Ser Tr-Columbia Marsico 21st Centry Fd
BARON PARTNERS FUND
ING INV TR-ING/EVERGREEN OMEGA PORTFOLIO
AMERICAN FDS INSURANCE SER-GLOBAL SMALL CAPITALIZATION F

Oct 29 01:08 PM

[Joe Friday:]

The real fools are the investors who entrust their money to those managers. If my money was in one of their funds I would be calling them up to find out their ratioinale for investing my money in NILE. That would be a fascinating conversation.

Oct 29 05:40 PM

[Stock Yid:]

Wow, I never received so much feedback on an article!

I ended up buying some of the Nov $45 Puts on it. This way I know what my max loss on it is and maybe, just maybe, this will be the quarter when the fund managers decide the charade must end.

Best of luck everyone!

Nov 02 09:51 AM

[ukdaytrader:]

Thanks for pointing this one out, since you did, I've made a few 000 on my short position. Keep up the very short, but informative analysis and do let us know if you find any other "muppet" stocks.

ps. Does anyone know where I can get a list of holdings that the "muppet" fund managers listed above have. If their analysis is anything to go buy, it may be worth shorting their entire portfolios.

Also note my terminology of "muppet" comes from a regional variation

en.wikipedia.org/wiki/...

Nov 02 12:23 PM

[Stock Yid:]

Now that everyone is up 10% on this call, I picked up the puts I wanted for their announcement on Thursday.

I bought the $45 Nov Calls. I would have liked to get them for $0.05 but there is no market for them so I had to almost hit the ask. I paid $0.30 which is dirt cheap if it hits my target of $17.50 - $25.00.

I wish myself luck :-)

Nov 02 02:43 PM

[Stock Yid:]

You can do a search for stocks with extremely high PEG ratios, the problem is the data from Finviz.com gives you year over year. I was using a spreadsheet that gave me yearly qtr over qtr. Basically compared 3rd qtr 2008 with 3rd qtr 2009.

Nov 02 02:48 PM

[ukdaytrader:]

You meant the Nov Puts.

You would have been better just shorting the stock, as the likelihood of such a large correction post November is remote. Typically just because a stock is down or profits are bad, the fund manager won't immediately dispose of the holdings. As someone else pointed out, unwinding large holdings in a relatively illiquid stock can become problematic and are done over a longer time period depending on the trading volume, otherwise they won't be able to sell it.

If I wanted to sell 10m shares but the average daily traded volume was 100k then its not going to happen.

The second thing to consider is that the fund managers holding this, it probably represents a tiny proportion of their overall funds so again they will not be bothered if they dispose of this in November post results or say in 3 months from now. The total cash available for reinvesting will be so tiny that it will become lost in the roundings.

Nov 03 01:35 PM

[Stock Yid:]

That is correct. I bought the Nov $45 Puts. I rarely trade the stock itself. I prefer the options. It limits my risk.

I usually dont pay too much attention to institutional ownership or insider ownership.

The stock may not drop to fair value this month but the only time there is a chance of a stock correcting to fair value is when they announce earnings. Look at DRIV & STEC as nice examples.

Nov 05 08:42 AM

[User 330746:]

This stock will shoot up on earnings.. there will be terms like raised outlook and people are still getting married.. ha ha.. and the tight float... it will go up. yup.. no one will pull the plug on this fraud now.. also look at the overall trend... DOW is again inching towards 10K...

sorry folks but shorting this is going to burn u.. in the short team

Nov 05 04:07 PM

[ukdaytrader:]

There are ways to make money as long as you can hold the short and you have enough covered for say a 30% move against you. It did shoot up on earnings today ($64) only to come back down by nearly $4, this volatility was not caused by increased volumes but by market manipulation. This is typical and in in this example had I not had enough to cover my margin I would have lost around $15k at the top v. profit at $60. The manipulation is caused to shake out the weak / inexperienced shorts which also results in rapid movements due to short covering.

On Nov 05 04:07 PM User 330746 wrote:

> This stock will shoot up on earnings.. there will be terms like raised
> outlook and people are still getting married.. ha ha.. and the tight
> float... it will go up. yup.. no one will pull the plug on this fraud
> now.. also look at the overall trend... DOW is again inching towards
> 10K...
>
> sorry folks but shorting this is going to burn u.. in the short team

Nov 06 11:13 AM