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BlueNile Added to S&P 600 Small Cap Index.
In a note to clients, Caris & Company analyst Tim Boyd discussed impact of adding online retailer Blue Nile to the S&P 600 Small Cap Index.
Blue Nile (NILE) will replace Lone Star Steakhouse on the index, however the date has not been set. "We note that while NILE is already a member of the Russell 2000, the S&P 600 has more stringent requirements for inclusion. In our view, this highlights NILE’s long-term financial viability," Boyd wrote.
The S&P 600 has a market cap of about $550 billion, and based upon Blue Nile's $550 million market cap, the online diamond retailer will receive an index weight of about 0.1 percent. "While it is difficult to estimate what kind of impact this will have on the shares, we note that Google shares rose 14 percent between the announcement of its inclusion in the S&P 500 [March 23, 2006] and the replacement date [March 31st.] On the one hand, NILE shares may not enjoy as much of a boost since the S&P 600 is not as widely replicated as the S&P 500; on the other hand, NILE could get an incremental pop because of the large short base [28 percent of the float, by our last count,]" Boyd concluded.
Boyd estimates a target price of $40 per share for Blue Nile -- a target price mentioned by several analysts for more than one year. Blue Nile rose above $40 per share briefly around Christmas 2005, but held within a range of $31-$36 per share for most of 2006. At opening bell on December 15, Blue Nile was at $35.53.
Potential risks, Boyd wrote, include decelerating revenue growth; minimal international presence; a challenging online marketing environment; and rising diamond and precious metal costs.
This indeed bears close monitoring as company insiders are selling their shares at a brisk pace.
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