2-Star Stocks Poised to Plunge: Blue Nile?

Market-lagging returns could be written in these two stars.

Brian D. Pacampara, CFA
Brian D. Pacampara, CFA
Jan 22, 2009 at 12:00AM

Based on the aggregated intelligence of 125,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, online jeweler Blue Nile (NASDAQ:NILE) has received the distressing two-star ranking. While one-star stocks have been the worst performers, our data has shown that two-star stocks still lag the market by a significant margin and should be approached with caution; conversely, highly rated stocks have outperformed the S&P.

With that in mind, let's take a closer look at Blue Nile's business, and see what CAPS investors are saying about the stock right now.

Blue Nile facts

Headquarters (founded)

Seattle, Wash. (1999)

Market Cap

$290 million


Internet retail

TTM Revenue

$321.4 million


Co-Founder/Chairman Mark Vadon
CEO Diane Irvine

Price-to-Earnings Ratio (NILE and Industry)

20.5 and 9.2


Tiffany (NYSE:TIF)

CAPS members bearish on NILE also bearish on:

Amazon.com (NASDAQ:AMZN)
General Motors (NYSE:GM)

CAPS members bullish on NILE also bullish on:


Sources: Capital IQ, a division of Standard & Poor's, and Motley Fool CAPS. TTM = trailing 12 months.

Over on CAPS, 61 of the 174 All-Star members who have rated Blue Nile -- or 35% -- believe the stock will underperform the S&P 500 going forward. These bears include goofyfool and TSIF, both of whom are ranked near the top 10% of our community.

Last month, goofyfool noted that the Blue Nile bear case all boiled down to price: "Overvalued on most fundamental ratios (P/E, P/S, P/B, and P/CF), margins are shrinking, and oh yeah, we're in a recession."

In a pitch from two weeks ago, TSIF also questions the seemingly steep valuation:

While ROE/ROA are very respectable and NILE has no debt ... [a]ctual book value is $1.05 PER share on a $23 stock ... [which] would be scary even for a stock that was soaring. Either I'm out of my element 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 carats is! Maybe I'm jaded here, but this diamond doesn't have the luster that its price tag is demanding.

What do you think about Blue Nile, or any other stock for that matter? Make your voice heard on Motley Fool CAPS today. More than 125,000 investors are waiting to hear what you have to say. CAPS is 100% free, so simply click here to get started.