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Nine Things to Consider Before Trying on Hot Topic


In the early part of 2009, shares were on fire; since then they've cooled. Now what?

Shares of Hot Topic (HOTT) were hot as Hades in the early part of 2009, but are now as cool as a cucumber. But is now the time to belly up to the California-based retailer's shares or head for the exits? Here are some of my thoughts ahead of its fourth-quarter results, which are due out on March 10.

1. When I see Hot Topic I see a good chain -- a popular chain that has a large amount of growth potential in the future. After all, it's proven that it knows how to channel the attention of the younger crowd. But looking at it from an investment standpoint, my thinking is that patience will be key.

2. Estimates have been moving downward, which isn't especially stylish. Contrast this to a company like Gap (GPS) -- which I find leaps and bounds more appealing -- where estimates have been moving up. Meanwhile, the estimates for Zumiez (ZUMZ) have been rising, too.

3. While Hot Topic has beaten estimates in three of the past four quarters, it isn't the only company out there that's exceeding expectations. What Hot Topic really needs to do is blow out the top- and/or bottom-line number in a big way in order to get investors' attention and place it on institutional radar screens again. I also think it's critical that it does everything in its power to keep the stock north of $5; below that mark it will be tough to get attention.

4. Although its comp store results for February were better than expected, is -7% really something to jump up and down about?

5. With the shares in the lower-end of their 52-week trading range, it would sure be nice to see insiders try it on.

6. On the plus side, as of October 31 it sported just over $91 million in cash and cash equivalents and short-term investments. Not exactly Microsoft (MSFT), but it's a smidge over $2 a share by my math, which I'd like to think could give it some cushion on the downside.

7. As far as the fourth quarter is concerned, the Street is at $0.18, and I think it will at least meet that estimate and possibly exceed it by a penny.

8. I'd much rather bottom fish Hot Topic than Abercrombie & Fitch (ANF), which I think is way too expensive.

9. All told, I'm an optimist, and I think the shares mount a big comeback eventually. But I'd like to feel as though a catalyst is on the horizon before bellying up big-time. Right now, I don't see one, so I shall sit firmly on my hands.

Hey, have a great day!
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No positions in stocks mentioned.

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