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
Getting hitched is getting ditched
Shares of Men's Wearhouse
"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?
Martha Stewart Living Omnimedia
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.
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.
: 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: ACOM) 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. (Nasdaq: WBMD)
: 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. (Nasdaq: GOOG)
I hate to leave you hanging at the altar XO, but I'm just not that into you.
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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.