Blue Nile Inc. - NILE - close: 36.85 change: +0.55

Stop Loss: 34.95
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on November -- at $---.--
Listed on November 12, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 153 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
NILE is in the services sector. "Blue Nile, Inc. is the original online jeweler. The company offers a smarter way to buy engagement rings, wedding rings, and fine jewelry by providing in-depth educational materials and unique online tools that place consumers in control of the jewelry shopping process. Blue Nile has some of the highest quality standards in the industry and offers thousands of independently certified diamonds and fine jewelry at prices significantly below traditional retail. Blue Nile can be found online at" (source: company press release)

The company has struggled to meet expectations. They had missed Wall Street's revenue estimates three quarters in a row. Their Q2 report was August 5th. Not only did NILE miss estimates but they guided lower. The stock dipped to $23.10 on its August report and that appears to be the low for the year. All the bad news may be priced in.

More importantly, after missing estimates for multiple quarters, NILE actually met estimates when they announced their Q3 results on October 30th. The company's Q3 results were a profit of $0.14 a share and revenues of $105.76 million, which is a +7% improvement over a year ago. International sales were a bright spot for the company with an increase of +25%.

Management then offered relatively bullish guidance of $0.42-0.47 a share for the fourth quarter versus consensus estimates of $0.43. NILE expects revenues of $159-174 million versus Wall Street's estimate of $162 million. This optimistic guidance sparked a short squeeze and the stock soared from about $30 to almost $35.

NILE has been able to hold on to these gains. The last two weeks has been a sideways consolidation phase for the stock. The shorts have to be terrified. NILE said they have bought back 1.2 million shares of their own stock this year. They didn't have a lot of stock outstanding to begin with. The most recent data listed short interest at 26% of the 11.75 million share float. Since NILE does not trade a lot of volume (only 153K on average) that is a significant amount of short interest.

Currently the National Retail Federation is expecting holiday shopping to rise +4.1% this year. That is above last year's +3.1% improvement and above the +2.9% 10-year average. Forester Research is estimating that online shopping will see a +13% improvement over last year. This should be a decent environment for NILE this year.

If NILE breaks out to new relative highs it could see another short squeeze. Tonight we are suggesting a trigger to open small bullish positions at $37.25. We do want to keep our position size small because NILE can be volatile.

Trigger @ $37.25 *small positions*

- Suggested Positions -

Buy NILE stock @ $37.25

- (or for more adventurous traders, try this option) -

Buy the Dec $35 call (NILE141220c35) current ask $2.75

Option Format: symbol-year-month-day-call-strike

Annotated Chart: