Throw This Stock Away

The house rules are simple in this weekly column. I bash a stock that I think is heading lower. I offset the sting by recommending three stocks as portfolio replacements.

Who gets tossed out this week? Come on down, XO Group (NYSE: XOXO  ) .

Getting hitched is getting ditched
Shares of Men's Wearhouse (NYSE: MW  ) are trading lower today, after the suit retailer issued problematic guidance. Its bread-and-butter retailing business is holding up pretty well, but the company had some cautionary words about its tuxedo rental business.

"We have observed a general slowdown in the wedding industry as reflected in our forward reservation bill," CEO Neill Davis said during last night's conference call.

Men's Wearhouse's growing market share in that niche will serve it well through the slowdown, but then I started thinking about the shrinking pie in general. If folks aren't getting married the way they used to, who would that hurt the most?

Blue Nile (Nasdaq: NILE  ) is an easy target since the upscale Web-based jeweler specializes in diamond engagement rings. However, it also sells a wide assortment of other bling. Just because folks aren't getting married doesn't mean that they're not dating or living together. Jewelry will continue to be a popular gift.

Martha Stewart Living Omnimedia (NYSE: MSO  ) is another company that generates a good chunk of revenue from the business of matrimony, but it's hard to bet against Stewart's company since it hired an investment firm to explore strategic alternatives a few months ago.

Then I settled on XO Group. If the name doesn't ring a bell, it's because the company was known as The Knot for years. It changed its name back in June to reflect its broader lifestyle websites covering everything from nesting to starting a family. Despite all of this, XO's flagship business remains running TheKnot.com and its related online bridal registry business.

I recommended shares of The Knot to subscribers of the Rule Breakers newsletter service five years ago when TheKnot.com was growing quickly as the planning hub of brides-to-be. After a few uninspiring quarters late last year, we booted the stock from our scorecard in January. It was the right call, since the stock had speculatively crept back to its 52-week highs at the time. It has gone on to fall by nearly 20% since the sell recommendation.

XO may have posted improving results during last month's fiscal-second-quarter report, but that's coming after years of recessionary doldrums. The $5 million in operating profit that it generated during the period pales when stacked against the $6.9 million it posted during the same quarter four years earlier.

XO in general -- and The Knot in particular -- just aren't as necessary as they used to be. Friends swap wedding service referrals for free through Facebook, and Angie's List has grown into a powerhouse of vetted reviews.

XO's shares just aren't cheap enough given the trends working against it. The cash-rich balance sheet helps, but XO just isn't worth 34 times next year's projected earnings. If you're going to tie a knot with a stock, XO doesn't mark the spot.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.

  • Men's Wearhouse: I may as well start with the suit discounter. Mr. Market didn't like last night's quarterly report, but I still see a company that is growing with healthy comps and a compelling valuation. Even in a soft economy we're going to be needing suits for job interviews, right? It's hard to pass up an advantaged niche retailer that just happens to be knocked down to less than 12 times next year's projected profitability.
  • Ancestry.com (Nasdaq: ACOM  ) : I have always been drawn to websites that draw valuable niche audiences. I thought I had it in The Knot several years ago, because there's nothing better than nervous fiancees looking to spend a ton of money to make their weddings special. WebMD (Nasdaq: WBMD  ) attracts another dream audience, but there are too many class action lawyers circling the wagon there this summer. More importantly, analysts see WebMD's profitability declining next year. Next? Ancestry.com is a subscription-based genealogy website. There were nearly 1.7 million subscribers at the end of June, a 28% leap over the past year. That's more in my wheelhouse.
  • Google (Nasdaq: GOOG  ) : XO relies on wedding service providers paying up to be featured on TheKnot.com. Despite all of the lifestyle site launches and acquisitions over the past four years, revenue has climbed just 22% higher at XO. Where are the advertisers going? My best bet would be Google. The search giant's AdWords platform makes it easy to smoke out leads for pennies per click. It's also hard to argue against Google at less than 13 times next year's earnings.

I hate to leave you hanging at the altar XO, but I'm just not that into you.

Please take our Motley Poll then scroll down to the comments section to explain your vote.

The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Ancestry.com, Google, and Blue Nile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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  • Report this Comment On September 08, 2011, at 4:15 PM, JeffMolly wrote:

    Oh Rick! Perhaps it's because you're a dude, but I take exception to your comment about the Knot not being relevant. Let me explain from a chics perspective:

    As someone who recently got married, I found it extremely comforting to see a placard on the counter of every dress shop I visited which stated, "As seen on the Knot". For brides-to-be the Knot holds a certain amount of trustworthyness and modernism that I feel you are discounting. Would I feel as assured when I step into a flower shop and read, "Hey brides, as seen on Facebook". Absolutely not. Facebook might provide another outlet for exchanging ideas but the Knot allows me to feel that I can trust the advice that is presented. Also, the services and offers from the Knot just seem to be classier rather than a recommendation from Angie's List or Facebook. The Knot doesn't recommend vendors from any random Joe Merchant.

    For me, the Knot is a cult stock, much like I used to view Apple and Krispy Kreme back in the day.

    I understand your point about valuation but I recall the same argument years ago with Apple.

  • Report this Comment On September 25, 2011, at 4:35 AM, ikkyu2 wrote:

    Oh JeffMolly! Perhaps it's because you're a marketing shill, but I couldn't help pointing out that you registered just to post this comment and haven't been back since.

    Astroturfers die in a fire.

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