Michael Kors Holdings Ltd (KORS), Zillow Inc (Z), Zale Corporation (ZLC): Three Stocks to Get on Your Watchlist

The amazing thing — and why I would choose to short Zillow over Trulia despite both being valued to the hilt — is that Zillow only has $170 million in net cash despite being valued at more than twice the size of Trulia. By comparison, Trulia sports a net cash position of $206 million. Furthermore, Zillow Inc (NASDAQ:Z) is far scarier on a fundamental basis at 11.5 times book and 22 times sales compared to Trulia at 14.5 times sales and just under seven times book value.

Zale Corporation (NYSE:ZLC)
It’s no Sirius XM or anything, but a loan from Golden Gate Capital in 2010 has completely turned around the struggling jeweler to the point that it reported its first annual profit this past year since 2008. For fiscal 2013, comparable-store sales jumped 3.3% with Zale Corporation (NYSE:ZLC)’s branded stores delivering a 4.7% increase in sales. But rather than reaching for the buy button, I’d suggest rewrapping these shares and finding out what the return policy is on this stock.

The first concern I have with Zale Corporation (NYSE:ZLC) relates to the price of diamonds. Since peaking in February 2012, diamond prices according to Diamond Search Engine have fallen by more than 8%. This drop has been partly masked by a retreat in metal prices, especially gold, which have helped boost Zale’s margins. However, in recent weeks metals like gold are rebounding in a big way, which could put the margin pinch on Zale Corporation (NYSE:ZLC) during the all-important Christmas season.

If you don’t think there’s any merit to diamond prices, take a closer look at higher-end diamond retailer Dominion Diamond Corp (NYSE:DDC) (formerly Harry Winston Diamond), whose share price has almost perfectly followed the up and down movement of diamond prices over the past year. Higher diamond prices are indicative of better margins; conversely, lower prices mean potentially weak margins!

The other concern here is based on Zale Corporation (NYSE:ZLC)’s existing cash flow and debt. Zale’s debt-to-equity of 221% indicates a big red flag because Zale’s only produced positive free cash flow twice between 2006 and 2012. With nearly $400 million in net debt, Zale Corporation (NYSE:ZLC) runs the risk of being unable to expand or even purchase new assortments of jewelry if it can’t pay down some of its obligations.

The article 3 Stocks to Get on Your Watchlist originally appeared on Fool.com and is written by Sean Williams.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool recommends and owns shares of Zillow.

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