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Diamonds Are A Retailer's Best Friend

By Mark Whistler

Tickers in this Article: NILE, ZLC, TIF

This holiday season investors may be wondering where the shopping rush (and profits) will be. The answer may be in the bling.

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Black Friday brought forth a plethora of deals for bargain hunters. This isn't suprising considering prices at the pump are taking away disposable income from consumers. The big retailers know it too, and have already taken steps and begun the dicounts to ensure The Grinch doesn't steal Christmas. But there's also something else to consider here, and it comes down to simple economic theory.

Jewelry can be an "inelastic" good, as changes in price generally do not greatly alter the demand. This may seem counterintuitive, but the thing about jewelry is that many buyers are those who have significant income to start with. They really don't care about the cash they're spending. Moreover, those who can't afford it often already have their heart set on making the purchase (like young men buying engagement rings), as there is no real viable alternative. (To learn more, check out Economics Basics.)

Large Buyers Shrug-Off Rising Prices
There's some concern about rising gold and platinum prices this season, however, larger companies like Tiffany & Co. (NYSE:TIF) and Zale Corporation (NYSE:ZLC) have less to worry about than smaller mom-and-pop shops. The simple reason is that larger buyers make their purchases one to two years ahead of time; thus, they have slightly more padding this season than the little guys.

For the next little while, price increases to precious metals could be less significant at larger, public companies than at smaller retailers. At the end of the day, the aforementioned is good news to investors who are hoping for great results from jewelry retailers this Christmas.

Breakfast At Tiffany's
Tiffany is certainly on the top of the A-List for jewelry stores. The company's name alone draws in hordes of would-be buyers. With a market cap of $6.6 billion, Tiffany certainly has the ability to throw its weight around, and it has a strong cash position too. It has around $130 million in the bank and a current ratio of 4.3. What this means is that if buyers completely stopped showing up tomorrow, the company could still pay its short-term obligations more than 4-times-over before running into a cash crunch.

Looking at recent trading action, the stock is volatile, with a 2007 range from roughly $40 per share to upward of $57. The stock hit a 52-week high of $57.32 in October, and has since fallen into the $48 area. What this means is that short-term investors may have slightly less risk as the present price could allow a "buy the dip" entry point, instead of having to chase the stock near a top. While buying Tiffany here certainly isn't a sure thing, the stock does look more attractive than many other retailers this season.

How Low Can Zale Go?
Finally, Zale Corporation has been in a downward spiral since 2005, but it could be a good bet for investors here. There's an old market adage: "never try to catch a falling knife". However, in the case of Zale, taking a position here, could mean finding a bottom, especially since Christmas, and its increased sales, are right around the corner. The company recently posted a wider than expected third-quarter net loss of net loss of $28.4 million, or 58 cents a share, while also presenting clear language in the earnings report that the 2007 holiday season could be troublesome.

So, why the positive notes? It's as simple as this: the bad news is priced in. When we look into the company's fundamentals, we see it is trading with an extremely low 0.4 price to sales ratio. Most retailers never trade with a price/sales ratio this low, and indicates the market has already taken the potentially cumbersome holiday season into consideration. At the end of the day, what it comes down to is when the market beats a stock down far enough, a rebound could quickly ensue, especially if the holiday shopping season turns out better than Wall Street predicted.

Bottom Line
Jewelry is one of those gifts that stay popular every Christmas. As such, adding a position in a jewelry retailer in your portfolio may be good idea if you want to cash in the consumer frenzy.

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By Mark Whistler

Mark Whistler is a trader, author and analyst. He is the senior market strategist at TradingMarkets.com and heads the Forex Trading Service Forex Force.

His books include "Trade With Passion and Purpose" (2007), "Trading Pairs" (2004), "Profit from China" (2006) and "Profit from Uranium" (2006). Mark's newest book, "The Swing Trader's Bible", co-authored with CNBC/Fox News regular guest Matt McCall, will be on shelves in the summer of 2008.

Whistler is also the founder of WallStreetRockStar.com and writes regularly for TraderDaily.com. In his spare time, Whistler operates an art gallery in Baltimore, Md., along with Eats For The Streets, a growing organization - dedicated to helping the homeless across America.

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