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, Conn's (Nasdaq: CONN).

This is no love shack
Shares of Conn's climbed 8% yesterday after posting better-than-expected quarterly results.

Yes, you can sell consumer electronics and still impress the market. You just have to make sure that you have furniture, mattresses, and even lawn equipment to save the day.

Yes, Conn's is bucking the malaise that sent Circuit City, Sound Advice, and CompUSA to bankruptcy -- for now. Its emphasis on bulky items that are tricky to e-commerce away and its geographical concentration that includes rural stretches of Texas, Louisiana, and Oklahoma have helped set the company apart.

This is no Best Buy (NYSE: BBY). Conn's doesn't depend on frequent visits from shoppers buying CDs, DVDs, video games, and books that have all gone digital. Conn's may very well hold up for a few more quarters given its model, but what happens next?

Things aren't entirely perfect right now. Conn's has actually closed more stores than it has opened over the past year, explaining why revenue only rose 11% in its latest quarter when comps soared 21.5%.

There's also the inevitability of Conn's seeing the Internet consume its business with better prices.

Investors can get out on top. Conn's stock hit fresh highs yesterday that were last seen in 2007. Ask shareholders in any publicly traded -- or once publicly traded -- consumer electronics retailer if they would love the opportunity to cash out at a multiyear high. They can't. Conn's investors can. The stock has more than quadrupled over the past year, but that means that the easy money has been made.

There are better opportunities out there.

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.

  • Select Comfort (Nasdaq: SCSS): A big part of Conn's success this summer was a 58% spike in furniture and mattress sales. If bedding is a hot item -- and that makes perfect sense as the real estate market bottoms out and folks are comfortable investing in creature comforts for the home -- why not buy a pure play on premium mattresses? Select Comfort's Sleep Number air-chambered bed is growing in popularity. Some bedding stocks have taken a siesta this summer, but Select Comfort posted blowout quarterly results.
  • Staples (Nasdaq: SPLS): Home office is another major Conn's category. Sure, we may be talking about PCs, printers, and computer accessories -- and not the wider gamut of home office supplies found at Staples -- but it's still a worthy comparison. Staples has been slammed this summer. Last month's quarterly report didn't help. Revenue and earnings declined, fueled in part by weakness overseas. I still see Staples as a stock worth owning. It's the category leader in a retail specialty that will improve as corporate America improves. Its fleet of localized warehouses and trucks provide free next-day delivery -- and that's something that online retailers can't do. Then there's the stock's 4% yield to reward patient investors as they wait out the turnaround.
  • (Nasdaq: AMZN): When Conn's starts to falter, it will probably be at Amazon's hands. The online retailer continues to gain market share in consumer electronics, and it's not afraid to send out the bulky items that may scare away less seasoned e-tailers. There are model advantages to Amazon that no physical retailer can match, and that's why probably most of the things currently selling at Conn's can probably be had for less through Amazon.

The market's seeing the pros of Conn's, but I'm looking ahead to see something different.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.