January 08, 2013 at 04:00 AM EST
New Trade: Long Apple ($AAPL) & Short Blue Nile ($NILE)
While I’m still working on my tech stock power rankings, I am very happy to go ahead with my first long & short trade of the year today, especially with a classic one for me. I am going long Apple (AAPL) and short Blue Nile (NILE). In the short term, it might not go my [...]

While I’m still working on my tech stock power rankings, I am very happy to go ahead with my first long & short trade of the year today, especially with a classic one for me. I am going long Apple (AAPL) and short Blue Nile (NILE). In the short term, it might not go my way but I continue to think that these stocks are massively misvalued. On an equal basis, Apple is making over 4 times what Blue Nile makes in earnings per share. Before I get into that, a couple of news:

-if you are interested in my opinion of the main social web plays (Facebook, LinkedIn, Zynga, TripAdvisor and Yelp), I wrote a post on SeekingAlpha this weekend!

Trading Rules Change

Over the years, I’ve received a lot of feedback regarding these trades and one that I continue to struggle to form an opinion on was again discussed last month, this time by Robert Zaleski who said:

“I’ve thought this numerous times, but I’m finally going to be bold enough to ask it. What’s the most a trade has gone against you and still succeeded? I ask this because it seems to me you should be cutting trades that are losers if they are at 5-10% down.

And when a trade is going well, I don’t think you should necessarily liquidate at 20%. Maybe you do once it hits 15+% or some other number. Or maybe you reset your 5-10% drawdown target.

Just curious how you came up with a 20/20 target.”

It’s certainly a fair point and one that I’ve been thinking about a decent amount and I do get the impression that this might improve my trading. It’s difficult to quantify it so I will change things a bit this time around. I will continue to use a 20%$ stop loss on these trades but will now give myself the liberty of closing trades higher than 20%. In such cases, I will reconsider if:

-trade reaches +30% or +40%
-earnings for one of the stocks comes up

Another change I’m considering is changing how I calculate my entry point (currently trade on the open)..I’ll continue to reflect on this. VWap is another option as is the close (a bit less wild than the opening price).

In any case, I will let you know that goes but once again, I truly appreciate the feedback, I’m very fortunate to have such great readers:) So let’s go ahead and dig into this trade, we’ll start off by looking at the numbers for both names:

TickerNamePriceEPSPE RatioPE Next YearSales GrowthAnalyst ratingBook ValueBeta
NILEBlue Nile Inc39.070.871.5235.984.543.550.631.31
AAPLApple Inc523.944.6411.939.1644.584.59125.861

Long Apple (AAPL)

I’m not sure where Apple will be in my 2013 rankings but one thing is for sure, the stock continues to look undervalued. It trades at a forward P/E of 9 or so which for a stock that continues to grow, seems awfully low. Sales and earnings did disappoint lately and there have been rumors that iPhone5 sales have been much lower than expected. That being said, Apple is not about to experience flat growth, still has some products lined up and a terrific cycle setup to keep up its momentum. Apple is now paying out dividends and has decided to resume some production in the US, making it more clear than ever that the Steve Jobs era was over. That is fine, Apple seems to be doing just fine.

Next earnings announcement: Jan 23

Short Blue Nile (NILE)

Once again, the stock that I continue to short over and over (generally with a lot of success I might add is Blue Nile) which is trading at a forward P/E of over 35. That could work if it was Facebook,, Kayak or TripAdvisor which all trade near that ratio).. the difference though is that Blue Nile continues to see little growth. I just don’t see anything that can explain Blue Nile’s high valuation in a sector where it faces a lot of competition. For some, Blue Nile is an expensive borrow so you can certainly look into alternatives such as getting short exposure through options or shorting another similar name.

I would agree that momentum is on Blue Nile’s side. Just take a look at recent growth rates for both companies:

That being said, it is nowhere near enough to justify the difference in valuations.

And the earnings per share growth is not nearly as impressive…negative growth in most quarters does that scream high P/E? Not to me..

Next earnings announcement: Feb 15

Disclaimer: No position on Apple (AAPL) or Blue Nile (NILE)

Stock Market XML and JSON Data API provided by FinancialContent Services, Inc.
Nasdaq quotes delayed at least 15 minutes, all others at least 20 minutes.
Markets are closed on certain holidays. Stock Market Holiday List
By accessing this page, you agree to the following
Privacy Policy and Terms and Conditions.
Press Release Service provided by PRConnect.
Stock quotes supplied by Six Financial
Postage Rates Bots go here