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Tech stocks - Thursday, October 2, 2008

Lighten Your Portfolio By Shedding eDiets.com

Is there comfort to be found in a market that didn't return the gigantic gains from the previous day? The staff at tech:stocker certainly isn't ready to start taking the cash from under the mattress and buy shares in every stock that has taken a beating recently (Apple (AAPL:NASDAQ) and Yahoo! (YHOO:NASDAQ) immediately come to mind. We're still waiting for Salesforce.com (CRM:NASDAQ) to go a little lower before giving them the buy recommendation). The next crash in the real estate market is right around the corner so if the package doesn't pass, we are going to be seeing not walk, but run from their homes. Why do we say this? In the last few days we've seen a plethora of houses erect "for sale" signs. If this was April or May, we wouldn't think twice but we are entering the "slow season" for real estate sales so only the desperate should be putting their homes on the market right now. And considering that only a select few can get a loan to actually make a purchase, we believe the real estate apocalypse is right around the corner.

Yesterday the staff at tech:stocker received an email from a friend who was inquiring about a stock, eDiets.com (DIET:NASDAQ). His financial advisor at American Express (AXP:NYSE) had called him and mentioned eDiets.com as a stock that was "positioned to grow despite the economy." He didn't know what to make of that quote so he asked us to do some research. Good thing we did.

After doing some initial research on this stock, we called our friend to see if he financial advisor truly recommended eDiets.com or was he pulling our leg. After 15 minutes of swearing on his mother's life, we finally believed him. Here's why we wondered how anyone could recommend this stock.

To start, eDiets.com hasn't posted a profit since 2Q 2006. While we are constantly being told that Americans are getting fatter, the only thing growing at eDiets.com are losses. Aside from the gut busting $0.02 eps posted in 2Q 2006, the company has been steadily losing money. Lack of profits are not the only reason to stay clear of a stock but the story only gets worse from here.

Over the first two quarters of 2008, eDiets.com net loss was $8,253,000 on revenues of $15,215,000. One could easily say the management lacks self-control when monitoring their spending but these figures look even worse when compared to the same time period in 2007: a net loss of $2,699,000 on revenues of $15,995,000. And yes, it gets worse.

President and CEO and Steve Rattner stated in the 2Q 2008 earnings release that the company has been "intensely focused on improving our new enterprise platform." While that might resonate with the employees at eDiets.com, it certainly doesn't satisfy shareholders who are hungry for profits. Mr. Rattner's background is in accounting making the numbers in the previous paragraph even more surprising.

What we don't find surprising is that eDiets.com is turning to alternative revenue streams. When we tried signing-up for the service (the staff at tech:stocker could definitely improve revenues for the site), we were bombarded with typical site offers associated with the free MacBook advertisements. The kicker was that these ads came before we entered any payment information.

We could keep going about the multiple typos in press releases and the juvenile look of the site, but we'll end it here. Because of their ability to over indulge in spending like a kid in a candy store, eDiets.com is the first stock that we recommend shorting. With the diminishing returns from their overly indulgent spending, we believe it's only a matter of time before eDiets.com "eats" their way out of existence. Our friend is switching their brokerage account to Charles Schwab (SCHW:NASDAQ) and changing his phone number.