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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, LinkedIn (NYSE: LNKD  ) .

Red is the color of your parachute
Shares of the white-collar social networking site tumbled nearly 5% yesterday, after LinkedIn fleshed out its secondary offering.

Even though we knew that the company would be selling roughly 1.3 million -- or $100 million worth of -- freshly minted shares, now we're learning that insiders will be selling 6.7 million of their own stock. Several key executives and early investors are unloading chunks of stock.

It's not as if anyone can blame them for cashing out a few chips. The stock is trading well above its May IPO price of $45. The stock has fallen since peaking at $122.70 shortly after going public, a peak that amounted to a mind-boggling $12 billion valuation. I went bearish on LinkedIn while it was still in the triple digits on Motley Fool CAPS six months ago, and I'm up nicely on that call.

This is how the game works. Take notes so this doesn't surprise you when daily-deals giant Groupon (Nasdaq: GRPN  ) does the same thing in a few months. A hot company files to go public, but hazy market conditions force it into scaling back its IPO. Hacking away at the shares originally offered creates a favorable supply-and-demand relationship. The debutante pops, and the company can ultimately offer the shares it wanted to all along at higher price points in the future.

The secondary itself won't be overly dilutive, since it's just 1.3 million more shares for a company with nearly 100 million shares outstanding. However, what it will create is a larger float as the insider shares are made available. It will take a lot more to move the stock higher in the future.

There's nothing wrong with LinkedIn the company. It's coming off a strong quarter where revenue soared 126%. It also surprised analysts with an adjusted profit for the period. However, a good company doesn't translate into a good stock, and it's here where we need to address LinkedIn's insane valuation.

LinkedIn gets less ridiculously overpriced the further out you go, but it's never cheap. Analysts see a profit of $0.27 a share next year, more than doubling to $0.67 a share come 2013, and more than doubling yet again in 2014 to hit $1.44 a share. Unfortunately, LinkedIn is still frothily priced, even if we go out three years.

A lot can happen in that time. LinkedIn's stronghold on corporate-minded social networking can be wrestled away by someone else. Investors may also realize that LinkedIn will never be as sticky as Facebook given the infrequent nature of job changes and the overestimation of virtual corporate networking.

The insiders know what they're doing here in locking up big gains. Investors should follow suit.

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.

  • Zillow (Nasdaq: Z  ) : There are a few similarities between Zillow and LinkedIn. They are two of the few dot-com IPOs to go public this year that continue to trade above their debut prices. That's already a pretty small fraternity. They're both coming off strong quarters, as Zillow posted a larger than expected adjusted profit on a 132% top-line surge. However, a big difference is that while LinkedIn users may largely steer clear of the site unless they're on a job hunt, Zillow is perhaps the only real estate website that doesn't just appeal to folks when they're buying or selling a home. Zillow's perpetually updated Zestimates and rent estimates for most of the homes in this country keep folks checking back often. Zillow isn't cheap, even at 32 times projected earnings in 2014, but it sure beats LinkedIn's multiple of 52 for the same year.
  • Google (Nasdaq: GOOG  ) : LinkedIn's biggest fear may be that Facebook -- already several times larger than any other social networking site -- can seamlessly add a layer to bond corporate-minded networkers. It's stickier and more social already. Another potential threat is Google+. The "circles" concept of sorting how things are shared already finds users dividing what goes out to friends, family members, and work acquaintances. Search engine giants have stumbled in the past with their Web 2.0 attempts, but Google may finally have cracked the code here.
  • 51job (Nasdaq: JOBS  ) : LinkedIn hasn't necessarily eaten into the more traditional ways that folks seek out new jobs. parent Monster Worldwide (NYSE: MWW  ) and niche specialist Dice Holdings (NYSE: DHX  ) continue to grow despite LinkedIn's presence. However, I'm going to go all the way to China for my third pick. 51job began as a company that would stuff area job listings into several local newspapers on a weekly basis, but now online recruitment -- a niche growing at an impressive 49% clip -- makes up 62% of its businesses. Forget going all the way out to 2014 to create some kind of manageable earnings multiple, as 51job is trading for less than 17 times forward earnings.

I'm sorry, LinkedIn. I'm linking out.

The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Google, 51job, and Zillow. 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.

Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 16, 2011, at 10:13 AM, jimmach123 wrote:

    To further the strength of this, you do realize the lockup on 24 million more shares ends Friday at close and that the employees (the little guys) will be dumping first thing next Monday, the 21st? The float is going to balloon to about 41 million shares from the current 9.75 mil. This thing is going back to its original IPO price or lower...what a scam.

  • Report this Comment On November 16, 2011, at 11:38 AM, kariku wrote:

    Why not short it outright then ?

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