Buying Blue Nile on Company, Analyst Cautiousness

I see nothing but cautious comments on Blue Nile (NASDAQ:NILE) this morning after extremely cautious guidance provided by management last night.

The stock is trading around $40 this morning after Citigroup and Lehman cut their ratings to Hold and several other firms are cutting their estimates and targets.

Must say I'm a bit of a contrarian in NILE this AM as one could see this one coming a mile away. There is close to a 30% short interest in the name, which pretty much proves my point.

From Citi:

What keeps NILE as a Hold vs. a Sell are: 1. Clear market share gains, 2. Long-term international growth opportunity, 3. A 6% '08 FCF yield with buyback potential; 4. Unique supplier relationships; and 5. A strong execution track record.

So I'm buying a small stake in NILE here around $40 betting that:

• Management is being overly cautious
• Shorts will want to bag at least part of the huge gain they are sitting on

Let's see what happens.

Comments

[LBC:]

i admire your bravery. i think, however, that we test the high $20s very soon. i see no reason to be early on this one.

2008 Feb 13 09:21 AM

[CK:]

Nile is ridiculously overvalued even after its drop today. Using 2008 estimates ($1.25 which are definitely too high), you get a PE of 36X. That is an insane valuation given 1) the current consumer environment, 2) they've averaged 24% EPS growth over the last 3 years - that's a 1.5 PEG - this stock isn't cheap!, 3) they are expecting a FLAT year. Paying a 36 multiple for a company that may at best see 10% growth this year is crazy. I agree with LBC that this stock will test the 20s before long. This is SHORT!!!

2008 Feb 13 10:56 AM