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, Quepasa (AMEX: QPSA).

No mas
Things have been looking up for social networking website Quepasa lately. Shares of the fast-growing Latin American social networking website soared 457% last year, and have continued to inch higher through the first few weeks of 2011. Quepasa closed out 2010 with 27.2 million registered users, up 255% year over year.

Facebook is much larger, but it's still private. MySpace is bigger, but it's meandering at the moment. In short, speculators have been bidding up Quepasa as the only stand-alone social network.

Facebook is about to cross 600 million registered users, and recent investments value Mark Zuckerberg's opus at a whopping $50 billion. This kind of math gets bulls in trouble. After all, if Quepasa has 4.5% the number of users as Facebook, why can't it be worth 4.5% of $50 billion -- or $2.25 billion?

Quepasa's closing in on a market cap of $220 million, so there's plenty of room to run, right? Wrong.

Just because Mr. Market's valuing the average Facebook user at roughly $83 a head doesn't mean that every smaller rival merits a similar valuation. On any given day, half of Facebook's users are on the site. They spend a collective 700 billion minutes a month on the site, or well over 1,000 monthly minutes per person.

Quepasa isn't even close. Despite its impressive count of 27.2 million users, the site experienced just 16.4 million unique visits in December. That's visits -- not visitors! The site served up a mere 184 million pages that month. In other words, the average Quepasa user took in less than seven page views for all of December.

Next, consider the financials. Quepasa posted an operating loss of $4.4 million through the first nine months of 2010, compared to the $4.2 million it rang up in revenue. Ouch.

Then there's this little disclosure nugget in the report: "Approximately 96% of the revenues for the nine months ended September 30, 2010 came from two companies of which a director of Quepasa is an officer or director."

If that doesn't send monetization red flags a-waving, I don't know what will.

Quepasa isn't cheap. There were 18.6 million fully diluted weighted shares outstanding by the end of the third quarter, and that's before the sale of another 1.7 million shares six weeks ago, at roughly half of today's price.

That said, at least Quepasa is a survivor. The company seemed on the brink of death early last decade, trading for mere pennies. Now it's actually growing. Even the mighty AOL (NYSE: AOL) couldn't handle the heat in Quepasa's native Latin America; it spun off AOL Latin America shortly before the Spanish-language appendage filed for Chapter 11 bankruptcy in 2005.

Quepasa has been inking attractive third-party ad deals lately, and it's also investing in social gaming to attract more users and keep them around longer. The lone major analyst putting out estimates sees a smaller deficit this year, on $17.5 million in revenue.

There's no way that this company is worth anything close to $220 million today, but if it can keep its users hanging around more often, and get more money from folks who aren't already company insiders, we may have something here.

Alas, at this point, the risks are too great. You can do better.

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:

  • MercadoLibre (Nasdaq: MELI)
    Latin America's leading online marketplace and financial platform isn't cheap, but at least it's consistently profitable. The stock is trading at more than 40 times forward earnings, but you don't want to bet against this company. It's blown past analyst profit targets in each of the past three quarters.
  • Net Servicos de Comunicacao (Nasdaq: NETC)
    Quepasa claims to be the fastest-growing social network in Brazil on a percentage basis. If you want to buy into the region based on its connectivity potential, why not go with one of the telcos that provide Internet services? In addition to this Sao Paulo-based provider of cable, voice, and Internet, you might also consider Tele Norte (NYSE: TNE) and Telecomunicacoes de Sao Paulo (NYSE: TSP). I'm keen on the healthy growth in revenue and cash from operations at Net Servicios over the years, though free cash flow growth has been a sore spot. Wall Street sees revenue and earnings growing 13% and 28%, respectively, this new year.
  • Banco Latinoamericano de Comercio Exterior (NYSE: BLX)
    If you want to bank on Latin American growth, why not bank on a bank? Panama City's Bladex has a financial presence throughout the region. Things are going so well for Bladex that it jacked up its quarterly dividend last week. Bladex's yield now rests at a compelling 4.6%.

I'm sorry, Quepasa. Yo no se que pasa aqui.

MercadoLibre is a Motley Fool Big Short short-sale pick. MercadoLibre and Net Servicios are Motley Fool Rule Breakers picks. Banco Latinoamericano de Comercio Exterior is a Motley Fool Global Gains selection. Motley Fool Alpha has opened a short position on MercadoLibre. The Fool owns shares of Banco Latinoamericano de Comercio Exterior. 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.

Longtime Fool contributor Rick Munarriz doesn't mind taking out the garbage every so often. He does not own 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. The Fool has a disclosure policy.