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Internet Darlings without their sparkle. The I3 Color Contenders!



January 08, 2009 – Comments (0) | RELATED TICKERS: NILE , BIDZ.DL , OSTK

I keep promising myself that I won't “sector slam”, or ALL IN, a sector here on CAPS. I have seen too many things in this nonsensical market to count on anything making sense, especially the obvious. Why risk that many accuracy points in one sector when there is so much out there to chose from?

Secondly, Sector slamming before earnings is generally “asking for it” as managements tend to be somewhat successful in spinning the news, and investors, especially mutual fund and institutional investors, are wary of admitting that they made a mistake with their clients’ money.  Give it a quarter or two and it could be all better before the Lemmings even know it!   Earnings are particularly subjective or spinable for sectors that have heavy seasonal variation, so these three could bump up, but I'm certain, will eventually go down!

I thought I’d take a look at the balance sheets of some of the “jewelry giants” and pick ONE.  Clearly jewelry is discretionary to some degree, unless you need an engagement ring for Christmas (suckers!) or wedding bands for that perfect May wedding.   (Just kidding on the suckers, I’m very happily married)!  Most of jewelry spending, however, can be deferred in a recession. 

 While I was concerned with thumbs downing a seasonal stock at the peak of their earning power, and only planned on picking ONE, I really, really had to stop myself (by writing this blog instead) after I’d thumb down’d two PLUS  another related internet stock, for my three outs to retire the side. Three serious I3 Color Contenders in the jewelry business.   I did bypass two other jewelry stocks for a thumb down after some restraining will-power, but three in one day is really, really against my motto! And no doubt I’ll be back later for another round!   Here’s the three I’m red thumbing:

BIDZ.COM  (BIDZ):  Bidz is the EBAY of jewelry. Insiders bought BIDZ shares last month in the $2 range and promptly sold them at $4. Shares have ramped down from $7 per share to $2.24, back up to $5 and are starting back down into the $4’s again.  Everyone likes a bargain, but this stuff is just as cheap at Walmart, Sears and JC Penny and at least there I can hold it in my hands first, or maybe return it if sanity sets in, or I correctly read my wife’s expression when she sees it! Their income statement would indicate that they are making money with reasonable margins but:

The 30 SEPT, 2008 balance sheet reports: NET Tangible Assets=$33M. Inventory=$47M. Tell me, how do you value inventory in a recession, especially cheap jewelry? Don't people want to look at, feel and touch jewelry? Internet Jewelry sales just absolutely amaze me, bargain or not. Internet Jewelry auctions are just plain scary. Any jewelry in a recession is a nightmare. How can you invest in a company whose "inventory" is "valued" at 42% more than the entire company????  How do you value inventory that you are going to list on your site for $0.01 in auction format?   While a company capped at only 3X book might not be scary in and of itself, try one whose market cap is $100 Mil, but whose book value is $33 Million. In this economy or not!

BLUE NILE  (NILE):   While NILE is down about 10% already in the last five days, in anticipation of disappointing earning; and piling on now might be too late for the feast, a review of NILE's balance sheets still leads me to believe that more carnage is to be had here … much more.

While ROE/ROA are very respectable and NILE has no debt; Price/Book is 22 which is suggestive of a “Rocket stock”, not one with 5% margins. Actual book value is $1.05 PER share on a $23 stock. NET Tangible=$15 MIL with a MKT CAP= $335 MIL would be scary even for a stock that was soaring. Either I'm out of my elements here or this company was not living up to potential before the recession. Even in a recession engagement/wedding bands might not be discretionary, but number of Karats is! Maybe I'm jaded here, but this diamond doesn't have the luster that its price tag is demanding.  ON a Color Scale this one is an I3.  (OSTK):   Very well known household name.  No lack of name recognition on this online shopping favorite.   Starting with the balance sheet, it has been redder for the past three years than this thumb I am giving it! 

Overstock’s model didn't work before there was a recession. Neg. margins, neg. ROA, Market cap of $250MIL when the Balance sheet is NEGATIVE $6MIL in Tangible assets? I thought BIDZ and NILE were bad, but a NEGATIVE NET balance sheet???  Overstock's business model had an interesting premise, but the bottom line is that 98% of stores, brick OR internet are discounting like they are overstocked on everything. Any inventory that you have on the shelf is an "overstock" in this economy. Even "branded" companies that have never had sales before are trying to snag their part of the limited amount of spending in this economy. Savvy shoppers expect even deeper discounts than what you would find from just being "overstocked". They want the merchants to "give it to them", even if the merchant has to take a loss, (and some are).  Overstock is only a middleman for a product that's already lost value before they receive it.So I’m red-thumbing two Internet Jewelry darlings and one related Internet shopping stock, all with earnings soon to be announced.  Will my RED thumb stand out in a sea of green for these retailers?  If even one beats my call in the next six months, this market is more irrational than even I could have imagined! 

 PS.  A color grade of I3 in the Diamond is the lowest grade of flawed and is often described as Frozen Spit.  Your foolish trivia for today!


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