As the market approaches it high for the year as well as a post financial crisis summit, I am looking to increase my short positions. The situation in Europe is hardly resolved, earnings estimates for the third quarter have come down significantly over the last few months and the "Fiscal Cliff" has yet to be resolved. I think the retail sector is full of possible shorts given tepid consumer confidence and job growth. I already have a short on Amazon (AMZN) and this week I added Blue Nile (NILE) to my short allocation.
"Blue Nile, Inc. operates as an online retailer of diamonds and fine jewelry worldwide. Its fine jewelry selection includes diamond, gemstone, platinum, gold, pearl and sterling silver jewelry, and accessories, as well as wedding bands, earrings, necklaces, pendants, bracelets, and watches." (Business description from Yahoo Finance).
7 reasons NILE has ample downside from $35 a share:
- Insiders have sold over 25% of their holdings over the previous six months. Not exactly a vote of confidence.
- NILE is priced at more than 39 times forward earnings. This is too rich for a company has grown revenues at just an annual rate of 4% over the past five years. Earnings growth over that time period is actually been negative.
- Operating cash flow over the past twelve months is down more than 50% from FY2009.
- The stock is actually selling over the median analysts' price target of $33 held by the 8 analysts that cover the stock. It also has not received an upgrade for a significant period.
- The company has a history of disappointing the investment community. It has missed earnings estimates seven of the last twelve quarters.
- The company's main market is U.S. engagement rings. Weddings are down more than 10% since 2001, hardly a solid tailwind.
- Some 25% of the company's international sales are in Europe. Given the debt crisis on the continent, I think this could be a troubled market for some time. The stock sells for a very generous five year projected PEG of over 3 (3.27) and does not pay a dividend.