Is there a stock market bargain brewing in the jewelry section?

Diamonds may be a girl's best friend -- and a man's largest dollar purchase of the holiday season -- but Charles & Colvard (NASDAQ:CTHR), the sole source for moissanite, the fast-growing diamond alternative, put on a less than dazzling performance Thursday morning. The stock is the second-largest percentage decliner on the Nasdaq after the company reported that a shift in its sales and marketing focus, toward cultivating existing relationships instead of new ones, will make its rate of growth more uneven than in the past.

The stock lost more than a third of its value in the morning but is still more than twice the price it fetched a year ago.

Moissanite is silicon carbide. As unassuming as that sounds, Charles & Colvard has mastered the growing of crystals of the quality required for reasonably priced jewelry. What makes moissanite an exciting alternative to diamonds for jewelers -- besides price -- is its comparable hardness and similar refraction (brilliance) but more than twice the fire (the measure of the crystals' ability to break light rays into a spectrum of colors).

All that brilliance and fire was certainly visible in the company's third-quarter results. Compared with a year ago, sales were up 118% and net income jumped 639%; sales were up 70% and net income was up 238% over the trailing 12 months. Please realize, though, that this is a small but rapidly growing company from which analysts expect 2005 sales of $59 million.

The risk, though, is sales concentration. Last quarter, 51% of Charles & Colvard's sales came from the supplier to J.C. Penney (NYSE:JCP) and 31% from the supplier to FinlayEnterprises (NASDAQ:FNLY), the largest operator of licensed fine jewelry departments at retailers like Federated Stores (NYSE:FD), Dillard's (NYSE:DDS), and some of the store brands owned by Saks (NYSE:SKS). While the company has test markets being conducted with retailers like the Gordon's Jewelers branch of Zale (NYSE:ZLC), it would be extremely vulnerable if its prime retailers change direction.

Here is why Thursday's drop is creating a buying opportunity. The change in sales and marketing direction is to "helping existing moissanite retailers more fully develop and grow their moissanite businesses." While Charles & Colvard still plans to add 1,000 outlets in 2006, maximizing sales at existing retailers would ensure that moissanite becomes a vital part of these retailers' operations -- an important step for a company with such a high sales concentration.

The one analyst making a projection expects 2006 earnings to come in almost 70% higher than 2005 projections, at $0.71, pricing the stock at 30.6 times its late-afternoon levels. And if you were to ask me, that's a reasonable price for a company that is profitably growing at such a rapid rate.

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Fool contributor W.D. Crotty does not own any shares in the companies mentioned. Click here to see The Motley Fool's disclosure policy.