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It's the most wonderful time of the year for e-tailers. Here are the stocks on our wish list.
November 23, 2004: 4:09 PM EST
By Paul R. La Monica, CNN/Money senior writer

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NEW YORK (CNN/Money) - Is it time for investors to sing the following yuletide carol?

"Deck your portfolio with Amazon and eBay. Fa-la-la-la-la, la-la-la-la. 'Tis the season to make an online retail play. Fa-la-la-la-la, la-la-la-la."

For momentum investors, it certainly seems time for the online commerce stocks, in advance of big holiday business.

Nearly 30 percent of eBay's annual sales are expected to take place in the fourth quarter. For Amazon, it's 36 percent.

The numbers for some smaller e-commerce companies are even more dramatic: upwards of 45 percent for closeout firm and upscale gift retailer RedEnvelope.

But investors need to be wary for the simple reason that the market has already been counting on holiday sales.'s stock has surged nearly 20 percent during the past month and RedEnvelope's stock has skyrocketed more than 55 percent.

Online shopping comparison site, which went public last month, is up 55 percent since its IPO. And then there's This online seller of closeout merchandise, which went public in August, has soared 133.5 percent in the past month.

RedEnvelope is not expected to post a profit in this fiscal year (which ends in March) and is trading at 51.5 times fiscal 2006 earnings estimates. isn't expected to make money in 2004 and is trading at more than 160 times 2005 profit projections.

Shares of smaller e-commerce firms Overstock and have outperformed shares of larger online retail rivals lately.  
Shares of smaller e-commerce firms Overstock and have outperformed shares of larger online retail rivals lately.

And eCost, which is expected to make money this year, trades at almost 200 times consensus 2005 earnings forecasts.

So investors with an eye on the longer term need to be selective. I hate to sound like Scrooge but investors should scream "Bah, Hambug!" when looking at the valuations of many e-commerce companies.

Said Mark Mahaney, an analyst with American Technology Research: "Even though they may be a seasonal trade, I'm not convinced that the holidays are the reason you want to own online commerce stocks."

Stocking stuffers

But there are some in the group that aren't trading at nosebleed valuations.

Amazon, for example, trades at just 32 times 2005 earning estimates, despite an expected long-term earnings growth rate of 17.5 percent.

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David Garrity, an analyst with Caris & Co., said Amazon has underperformed its peers lately (shares are flat in the past month) because of investors' fears about relatively weak average order volume in the fourth quarter. He thinks these concerns are overblown.

"Amazon is well positioned for an upside surprise and the stock could be poised for a nice run going into year-end," said Garrity.

And online jewelry retailer Blue Nile is trading at about 37.5 times 2005 earnings estimates. While that's not exactly a bargain, it seems reasonable considering that earnings are expected to increase at about a 30 percent clip annually, on average, for the next few years.

"Blue Nile has a great opportunity. It has created an attractive little niche in the jewelry industry and it should continue to grow so the valuation for the longer term is fairly attractive," said Dan Geiman, an analyst with McAdams Wright Ragen.

Blue Nile has taken a notable dip lately, falling almost 20 percent in the past month, but Geiman said, he thinks the stock has declined mainly because of two short-term concerns, which should not trouble investors with a longer-term horizon.

Tech Biz
Electronic Commerce
By Paul R. La Monica

First, the rising price of diamonds may possibly hurt demand but Geiman thinks prices should stabilize soon. Second, there has been some insider selling lately as the lockup period for some shares recently expired. Blue Nile went public earlier this year.

Finally, there's eBay. You can't call the stock cheap. It trades at nearly 70 times 2005 earnings estimates. But what's not to love about the company? It's been profitable since going public in 1998 and earnings are expected to grow at a 35 percent pace annually for the next few years.

And as the company's popularity continues to increase, Mahaney thinks that it could emerge as one of the biggest winners of the holiday shopping season.

"eBay is showing a continued migration from being a niche collectibles site to a much broader retail presence so it should benefit and participate in any online seasonal strength," said Mahaney.

Of course, expectations for Amazon, Blue Nile and eBay are extremely high. But Garrity said that the pressure is greater on the online commerce stocks like Overstock and since they have experienced such tremendous gains lately. Momentum investors are unforgiving...even during the happy holiday season.

"If these companies fail to execute, woe be to those who own them," Garrity said.

Analysts quoted in this story do not own shares of the companies mentioned. McAdams Wright Ragen has performed investment banking for Blue Nile. The other firms do not have banking relationships with companies mentioned.

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