JADE – Initation of Short Recommendation

By: ispeculatornew
Date posted: 02.11.2007 (12:00 am) | Write a Comment  (0 Comments)

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JADE – LJ International (Nasdaq) (Closing Price on Friday 2/9/07 – $8.12)

LJ International has been on quite a run since the beginning of the year. JADE’s stock price has almost doubled in just a couple of months and I think now is a great time to short the stock.

A growth in earnings or lack thereof is what ultimately determines whether a stock’s price will increase or decrease. LJ International’s stock price is up significantly even though the company is forecasting almost no growth in earnings per share this year.

Last year LJ International reported total earnings of 3.44 million (0.24 per diluted share). They have given guidance for the current year for total earnings of 4-6 million (0.20 – 0.28 per diluted share). If they only meet the low end of their guidance their earnings per share will actually be down year over year. If they make the top end of their guidance earnings per share will only be up 17% year over year. LJ International hasn’t given guidance for next year but there is plenty of improvement already priced in. I think there is no way the share price is going to hold up when they report earnings next quarter.

Another huge problem with LJ International is dilution. Last quarter they reported 18.36 million diluted shares. In the corresponding quarter the previous year they had 14.18 million diluted shares. This is a 29% increase in diluted shares and explains why LJ’s earnings per share are not going up even though overall earnings are.

Furthermore, last November LJ International filed a shelf registration with the SEC to sell up to 100 million dollars worth of stock and warrants. It seems any improvement in future earnings will be offset by future dilution.

I think the stock price of JADE has gotten well ahead of the fundamentals and I would recommend shorting JADE at the current price.

Disclosure: I am not shorting shares of JADE.

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