Earnings Will Sink Blue Nile's Stock

Includes: AMZN, BIDU, LNN, MA, NILE, V
by: Options Weekly

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 (NYSE:V) & Mastercard (NYSE: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.