Mark Perkins sends: LJ International (ticker: JADE) is a Chinese jeweler that recently got hammered after delaying their annual report and getting a notice of delisting from the NASDAQ. JADE is fighting the delisting notice, and the true effects of that action remain unclear. As a result of the news, the stock is trading at about 27 times trailing earnings and is likely to grow at 25% or more. The company has come onto the radar of many institutions this year, whose buying drove shares up 200% year-to-date before the recent sharp selloff - the stock had traded as high as just over $12 a share or a 35x PE multiple.

First Impressions:
When I found out about JADE months ago the stock was trading for $9.50. After looking at their annual report and some quarterlies in about March or April, I came away with three serious impressions - none of which made it a convincing buy.
1. The company was going to grow very fast in China as the leader in jewelry stores with their ENZO brand. They had success in the U.S. as well at some major retail stores. The growth story looked promising.
2. The stock was overvalued. Definitely no margin of safety. I knew with one slip-up in earnings or even just a poorly perceived announcement, what just happened (JADE has fallen by 30% in the last two weeks) would happen.
3. The CEO had a large stake in the company, but the annual report seemed too much like a marketing tool opposed to a letter to shareholders - definitely a violation of Warren Buffett’s principles.

Since this is a growth stock that everyone loves, it has gotten a high multiple in the past. That may not happen again, so for future valuations a more conservative approach should be taken. Giving JADE a multiple matching its growth rate (25%) against EPS estimates of $.42 a share, the stock is worth roughly $10.50 a share.

No one knows beyond a reasonable doubt how much JADE will even earn next year or for the next five years, keeping it simple and conservative makes sense. If this were a large-cap with predictable earnings, then a discounted cash flow would be more appropriate, and forecasting earnings over the next five to ten years could be possible as well. As it stands though, we will stick to a simple conservative multiple for JADE.

You don’t need a scale to tell if something is extremely overweight. Right now at this price, JADE doesn’t look like a safe enough buy. I’d wait for it to
get cheaper, then buy with the possibility of holding it for at least a couple years and letting the growth story materialize once others have begun to discount it.