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
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
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.
Are you looking for great small-cap companies that are ready to grow and gush free cash flow? Let the Motley Fool Hidden Gems newsletter bring you two selections to consider each month. Try a free trial subscription today.
Fools, now is the time to open your hearts and wallets to worthy causes! Please support our five Foolish charities at www.foolanthropy.com .