Cohen's SAC Takes 5.4% Stake In Blue Nile

 | Aug 07, 2013 | 1:00 PM EDT  | Comments
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SAC Capital Advisors, managed by billionaire Steve Cohen and his team, own about 670,000 shares of online jewelry retailer Blue Nile (NILE), according to a filing with the Securities and Exchange Commission.

This comes out to 5.4% of the total shares outstanding of the $490 million market cap company. On average, over 160,000 shares are traded per day, so at the current price of almost $40 there is more than $6 million in daily dollar volume. SAC's position is about double the number of shares the fund had owned at the beginning of April, according to its most recent 13F filing.

Blue Nile has reported its results for the second quarter of 2013, which showed growth picking up. Revenues rose by 19% versus a year earlier, a similar growth rate to what the company had done in the first quarter. Management has been able to hold down growth in Blue Nile's costs, and as a result earnings have grown even more in percentage terms.

In the first half of the year, earnings per share came out to 24 cents, double what the company had earned in the first six months of 2012. Cash flow from operations has been negative, but that is due to declines in Blue Nile's payables in line with seasonal trends (quarter four tends to be big for jewelry retailers).

The stock's current valuation represents a trailing earnings multiple of 51, so markets have already priced in considerable future growth in the business. Blue Nile has been growing nicely. So the stock would be more attractive if these high earnings growth rates could be extended to the critical fourth quarter of the year and beyond. Wall Street analysts are predicting 82 cents of earnings per share this year, and then $1.07 in 2014.

This implies a 30% growth rate in earnings per share next year. While recent growth on the bottom line has been more rapid than that, we would expect the growth rate to fall as the base amount of earnings increases. Even if Blue Nile hits this target the forward price-to-earnings ratio, based on this much earnings per share, is 37. The company would have to continue to deliver high growth in net income for several years beyond that point. The most recent data shows that many market players are less optimistic than Cohen and his team: 27% of the float is held short.

Another small-cap jeweler is Zale (ZLC). In addition to physical stores in North America, Zale also has an online retailing operation. Zale is unprofitable on a trailing basis, and sales actually fell slightly in its most recent quarter compared to the same period in the previous year.

Comparable sales growth was low, and was offset by closing some of the company's locations. It trades at 23x trailing earnings, as analysts expect it to be profitable next year. It does make sense, however, that the stock trades at a discount to Blue Nile on a forward earnings basis. This is because of its current unprofitability and its focus on physical locations (which seem to be supporting lower sales growth at this time).

As a result, Blue Nile does merit at least a somewhat higher forward price-to-earnings ratio than Zale, but we are a bit concerned that analysts might be being a bit optimistic here. Their forecasts assume that earnings per share will grow at a faster rate next year than the company's revenue has over the past few quarters (and, presumably, the growth rate of sales going forward).

We wouldn't rule Blue Nile out as a growth stock. Shorting does not appear to be a good idea, given the high short interest, but investors should still be wary of following SAC here.

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