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, (Nasdaq: REDF).

Fasten your seat belts
I heaved Rediff, one of India's smaller website portals, into the trash four months ago, when the stock was trading just shy of $6. I seemed like a genius as the stock went on to crater in the weeks to come, but I'm looking pretty dumb right now. The stock has more than doubled over the past month. Rediff is now a good trading day or two away from breaking into the double digits for the first time in three years.

I'll eat crow when I'm wrong. However, in revisiting Rediff's fundamentals to see what I may have missed, I'm still convinced that this is not a stock worth owning -- much less at today's prices.

Oh, I get the argument of dot-com plays in India as a ground-floor opportunity. 

There are a whopping 700 million mobile phone users in India, but just 10.3 million broadband accounts. The government is committed to boosting connectivity rates in the coming years.

However, just because Rediff is the only standalone Indian portal trading publicly stateside doesn't make the pure play a worthy investment. It's too small a player. It's shrinking. It hasn't turned a profit in ages.

If you're warming up to Rediff as a play on India's dot-com revolution, you're pointing in the right direction, but you're aiming too low. It's like guessing that the Internet is going to be huge in the late 1990s, but settling for AltaVista or Lycos.

Rediff will post its fiscal-third-quarter results Tuesday morning. Given the huge run in the shares over the past few weeks, it may be best to sit this one out on the sidelines.

Rediff just isn't a very compelling growth stock. Revenue inched 21% higher in its most recent quarter, but it's nowhere close to where it used to be. Revenue of $18.8 million in fiscal 2010 is 42% below where it was two years earlier. You have to go back three years to find the last time that Rediff was profitable, and even then this is a company that reported its earnings down to tenths of a penny.

Do you really think India's online migration has gone backward? It hasn't. It's been slow relative to China, sure, but Rediff wasn't even keeping up with stagnancy until its recent baby steps forward on the top line. MakeMyTrip (Nasdaq: MMYT), India's leading travel portal, has its valuation concerns, but at least it's earned its stripes as a growth stock.

Why is Rediff being valued as a $250 million company? It's a small player generating less than $2 million of profitless revenue a month. I'll give the company its nearly $43 million in cash to arrive at a kinder enterprise value, but Rediff is worth far less than today's hype-padded markup. 

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.

  • Sify Technologies (Nasdaq: SIFY): As another speculative Indian stock that has popped recently, it too is headed for an important quarterly report in a few days. It reports Friday. The provider of connectivity, hosting, and other IT-related services generated more revenue in its latest quarter than Rediff has in its past seven quarters combined. Both companies are struggling with profitability issues, but Sify is the better value, and is perhaps positioned even better than Rediff to make the most of India's dot-com upgrade at both the enterprise and consumer levels.
  • Baidu (Nasdaq: BIDU): China's the place to be for investors who want a little more certainty -- and lot more profitability and growth -- out of their Web-based investments. Compare MakeMyTrip to (Nasdaq: CTRP) -- where revenue soared 49% in its latest ridiculously profitable quarter -- for a practice run. Then compare Rediff to Chinese portal (Nasdaq: SOHU) or search leader Baidu. I went with Sohu in the original Rediff diss column. It's a worthy replacement with a lucrative online gaming catalyst, but I'll mix it up by going with big, bad Baidu this time around. Earnings more than doubled in Baidu's latest quarter, with revenue at Baidu soaring 86%. It's not cheap, but at least there's an "E" in Baidu to work into a P/E (price-to-earnings) calculation. 
  • Google (Nasdaq: GOOG): I'm sure there's a conversation taking place in a speculative chat room or dim-lit cocktail party where someone is pitching Rediff as India's Google. That's funny, because India's Google is actually Google itself. Big G is the top dog in India, commanding a thick 81% share of the market just two years ago. Unlike Baidu's ability to be an early leader given its proficiency in character-driven search, English is India's secondary official language. Rediff's already behind the stateside behemoths, and there's little reason to believe that a laggard with limited resources won't continue to fall behind the pack.

I'm sorry, Rediff. You're nothing but a big "if." Please take our Motley Poll, then scroll down to leave a comment.