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This article is now exclusive for PRO subscribers. (subscription required) sent an alert to clients Wednesday adding The (ticker: KNOT) as a short position to an aggressive portfolio. Full text:

Aggressive Growth Portfolio Shorts The Knot (KNOT)
Establishing a medium term short position into the KNOT's recent runup.

At 3:25 PM today [April 6th], we shorted 900 shares of The Knot (KNOT) at $9.39 per share for the Aggressive Growth model portfolio.

The goal of the "high risk, high return" Aggressive Growth model portfolio is to provide you with aggressive "swing for the fences" investment ideas. An idea must have true "home-run return potential" to be included as a holding in our Aggressive Growth model portfolio.

At the time of the short sale, KNOT’s bid was $9.39 and ask was $9.50. It is our policy to make any purchases at the ask price, and any sales (and short sales) 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). Of course, if the stock goes up, you’re on the hook to buy back the stock at a higher price at some point.

The 900 shares we sold yielded $8,451.00, representing roughly 3.5% of the Babe Ruth portfolio. Including a $15 commission fee, the total transaction yielded $8.436.00.

Note: We recently renamed the "Babe Ruth" portfolio to the "Aggressive Growth" portfolio.

** Why Short The Knot (KNOT - 2,2,3)!? **

While we've certainly been finding more opportunities to put new money to work lately on the long side in the tech sector (as witnessed by our recent buys of RCOM and YDIW, as well as our recent new buys of existing holdings, LNOP and RBAK), it doesn't mean that we're not also seeing new opportunities emerging on the short side.

On Monday, we took a detailed updated looking at vertical online/offline media company The Knot (KNOT), a name that we've never owned, but that we favorably profiled back in the fall of 2002 when the company was still a penny stock. KNOT survived the dot com meltdown and has evolved into a solid and growing business over the past two years.

In recognition of the company's revitalization, the small cap media play was re-listed last week on the Nasdaq. So far, the Nasdaq and KNOT have been (excuse the pun) a "match made in heaven" this second go round. Thanks to a bullish mention in BusinessWeek recently and the new Nazz listing, shares of KNOT have risen 45% just over the past two weeks and 85% year to date. This was a $3.50 stock last fall before the market's rally.

With KNOT shares up 15% just in the past two days alone, we believe the risk-reward has shifted sufficiently in our favor to take a shot at this name from the shortside. Note that we are establishing only a 3.5% initial weighting in this position for risk management purposes. After all, there's always the chance that some small analyst boutique could soon start coverage on the stock and slap an optimistic price target on the stock now that it's back on the Nasdaq. This could give the stock another leg up and make it an even riper short.

Our valuation work suggests that the fair value on this name is closer to the $6.50 level using some best case estimates, and around the $5.50 price range using the most realistic assumptions. Taking the most optimistic 2006 earnings estimate we've seen for the KNOT of 46 cents per share, this means that the stock is now trading for 32x 2006 earnings on a "fully-taxed" basis and more like 40-50x on our 2005 estimates.

Keep in mind that our KNOT bet isn't just a valuation short on our part, as valuation shorts can be very difficult. With the stock's big surge year to date, amid a flat to down year so far for its peer group, we believe the stock faces a growing number of risks at these newly elevated levels. For one, we wouldn't be surprised if the company looked to do another secondary at these price levels to put more cash on its balance sheet. Dilution from this deal would likely put short term pressure on the stock. Further, KNOT has had execution problems in the past (see its e-commerce stumbles) and we're skeptical that the company will endure clear sailing this year as it launches and operates new properties.

The competitive landscape for KNOT is varied, and while the company has carved out a good niche, it is swimming in a space with big fish like Conde Nast (Bride's, Modern Bride). A lawsuit with competitor Wedding Channel also goes to trial later this year.

We believe the KNOT needs very crisp execution to support its increasingly frothy valuation and if the company runs into some typical "growth bumps", it will be "look out below time", given the growth assumptions that have now been baked into the stock. KNOT management is competent in our view, but not overly impressive, and we have yet to see KNOT demonstrate 'Net company-like operating leverage in its business model.

KNOT's top line grew a respectable, but certainly not spectacular, 13% to $41.4 million last year (we think growth could pick up to the ~20% range this year) and the company looked to have posted an operating profit of over $3 million after special legal expenses.

The primary risks we see to this short, beyond a new analyst tout of the stock over the short run, is that the company: 1) builds up more operating momentum and faster growth/margin expansion over the course of 2005 than we expect 2) is acquired at an even frothier premium. We acknowledge that more value accrues to vertical media plays as they scale. We are comfortable with these risks, though, and believe KNOT is a good medium term short at these levels, and we would look to add on additional strength.

KNOT chart below.