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No. of Recommendations: 4
Hi Jim,

When ever I am faced with a decision of either/or, I think in terms of selling half of both. This way I can keep my portfolio dynamics less changed. That is always an option too.

These are my thoughts on the two companies based on my updated notes.

Blue Nile price is up considerably from its 52 week low of $22.94, but there earnings aren't much better. They are taking less stock based compensation, but they are in my opinion still over paid. Their performance has been pretty bad. They blame input costs and I can sure understand that, but that problem isn't likely to go away soon. The holidays are approaching, so they should generate some good cash flow. But all the good news that I can imagine happening is in my opinion reflected in the present stock price. Their earnings of $0.14 for the latest quarter was good compared to their first quarter disaster, but it is only higher than last year, because they reduced stock based compensation by $0.02 and reduced the number of shares they had outstanding. They actually made less money in their latest quarter than last year, but the earnings per share was $0.01 higher. NILE is making $0.55 per share now. Since they purchased shares, htey have picked up a little debt not much and reduced cash to about $30 million. They still have a strong balance sheet, but I don't see them buying back too many more shares without a very strong holiday quarter. Last year, they made $45 million in cash flow for the fourth quarter. For the entire year, NILE made $10 million in cash flow.

SKX last quarter earnings were $0.22 up from $0.17, so they are reporting much better numbers. That could follow over well during the holidays. Presently I like SKX better at the present price $18.47 with the holidays coming up than I do NILE with the holidays coming up. SKX is also up considerably from their 52 week lows, but I think they can run up more, but that is just an opinion. I also own SKX and I haven't yet purchased NILE, but it has been on my wish list.

I would be an owner of NILE today if stock based compensation was lower. Or if they could continue to grow earnings even if just slightly each year.

You could lighten both stocks, in this way no matter which one does well or does badly you are only 50% exposed one way or the other. I tend to lighten stocks rather than sell entire positions.

But if you are asking my personal thoughts on which stock I think can run the most by their holiday report, I would go with SKX this time. Long-term it is very hard to say. I really believe NILE will continue to grow over the decades and take market share from brick and mortar jewelry stores, but perhaps Amazon might be hurting them too. I will continue to study NILE, but my preference this year is SKX. I believe it will go up over $20 again and if the holidays report is a good one as the third quarter was good, they might go over $25.

SKX cash flow last year was pretty good even as earnings crashed.
Last year, SKX made $42.68 million or $0.87 per share in cash flow, but for the quarter, they made $85.222 million. For the first nine months of this year, SKX has reported negative cash flow of (49 million) compared to negative cash flow ($42.5 million) which is a bit worse than last year. The difference is in inventory. They reduced inventory last year, which helped cash flow, but hurt earnings as that inventory went out at discounts. This year, they have built inventory and I hope that it will sell. Regardless, they should make more cash flow than NILE, yet they are selling for a much lower price than NILE.

Let's say SKX makes $35 million (which would be bad)in cash flow for they year. That would be $0.70 per share for a cash flow yield of 3.77%.

If NILE makes $20 million in cash flow this year which doubles last year's amount, their cash flow per share would be $1.55 which would give them a cash flow yield of 3.88%.

Who will do better? Or who is more likely to succeed this holiday. Can Nile double their cash flow which would give them a yield of 3.88%? Can SKX make just $0.70 which is lower than last year which would give them a cash flow yield of 3.77%. I am leaning toward SKX.

Those are my thoughts and how I look at the two stocks. When I am faced with having to sell two stocks, I tend to lighten both, rather than sell entire positions which I am very slow to do. I hope the information here will help you make a decision. Let us know what you decide to do.

tom e
thomas engle
TMF Coverage Fool
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