Summary
This article, and the client request, involves the share prices of Blue Nile, which were recently downgraded by Citicorp. Blue Nile is a high-quality jeweler selling gold and diamond jewelry. I am writing this analysis, requested by the client, about Blue Nile as a company, and about the related topic of its recent performance, without making predictions.
Analysis
This article concerns the share prices of Blue Nile which have recently been downgraded by Mark Mahaney of Citicorp. Mr Mahaney gives a target price of $88, noting that Blue Nile share prices are up 19% since the second quarter, which he feels implies expectations of another strong quarter. The article relates how Citicorp recently downgraded Blue Nile from a hold to a sell, appropriate at the time.
I like Blue Nile and its concept, a high-end gold and diamond jeweler offering custom designed jewelry, at a reasonable price, on the internet. At that time sales were up 27% which was good, and prices had slightly declined with the price of gold.
Blue Nile is a jewelery company that sells a high-quality gold and diamond product. Since we are dealing with gold and diamond jewelry, we must review the price of gold and diamonds. Historically gold has spiked almost every September for the past 30 years. Gold then usually has a substantial correction in October. This is because of demand created by the purchasing of gold by Indian and Chinese jewelers in September. Although we have yet to see the correction this year, we did have the September increase in gold. The rise in price and then correction in the price of Blue Nile coincides with the traditional rise in the price of gold in September.
Citicorp may have a motivation beyond the simple share price of Blue Nile, there is a motivation for Citicorp to downgrade a gold related company, and that is that Citicorp is deeply invested in paper currency, debt notes, and mortgages, during a weak time in those markets. Gold is the inverse to these markets, therefore, Citicorp has an interest in keeping the price of gold and its related companies low.
The price of Blue Nile did increase in September from $76.00 to $100.00 that matched the increase in the price of gold. We then see a sharp decline in the price from $100 to $81.84 which would coincide with a traditional correction in the price of gold in October. At the end of September and early October there was a definite flattening off at the top of Blue Nile at $100. After the first week of October Blue Nile began to decline in price. The price has reached the target price of $88 set by Mr. Mahaney.
It is most important to remember the most important factors inherent in business, and the most important of these in the case of Blue Nile, is the price of gold, and the quality of the Blue Nile Product, which I like.
We must remember that Blue Nile is a jewelry company dealing in gold and diamond jewelry. Demand for gold and diamonds is strong, and demand for items made of gold and diamonds is increasing over the long-term. Jewelry demand in countries as India and China remains strong and increasing, especially during the bridal season. While it is true that recent increases in the price of gold have slightly reduced the sales of jewelry in India, demand still remains at all time highs, and will increase as the demand for gold increases.
Blue Nile is a strong company that sells a high-quality gold and diamond product during a period in the market cycle when gold and diamonds are increasing in demand and value. Anything made of gold will move with the price of the commodity the product is made of, and for Blue Nile that is gold and diamonds. It is wise to never go against a market trend, and the long-term trend for gold is positive.
