Stocks That Go Bling and Boom

One way to decide whether a stock is a buy is to cut through the reported earnings rigmarole and get a handle on how much true value managers create for shareholders.

Borrowing a concept from consulting, the New York-based quant shop Matrix USA does this by calculating the "economic value" added, or EVA, by managers. It then blends in valuation and volatility measures to cook up stock ratings. This system has a good record, as I wrote two weeks ago.

In that column, we looked at two stocks panned by the shop. Now let's take a look at three it considers buys in an odd combination of sectors involving romance and the military. Blue Nile (NILE - commentary - Cramer's Take) sells diamond engagement rings online, while Armor Holdings (AH - commentary - Cramer's Take) and L-3 Communications (LLL - commentary - Cramer's Take) sell military equipment.

Do these three come up strong in the Matrix system because all is fair in love and war and accounting? Who knows, but here's a closer look at these companies.

Blue Nile

For a generation of Internet surfers accustomed to pursuing love on dating sites like Match.com, shopping for something as personal as an engagement ring on the Web is, like, no problem.

For proof, look no further than the robust sales growth at Blue Nile, an online jeweler that caters to Web-savvy romantics hunting for some bling to express their amore. Blue Nile sales shot up 29% last quarter.

But investors are flocking to Blue Nile for another reason as well. Blue Nile has a business model that drives capital costs down to almost nothing. Because of special arrangements with jewelry suppliers, Blue Nile carries virtually no inventory. Instead, Blue Nile places orders with suppliers after making a sale. "Their cost of capital is almost zero, so their return on capital is almost infinite," says Ivan Feinseth, the director of research at Matrix.

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At the time of publication, Brush held none of the stocks mentioned, although positions may change at any time.

Brush is an award-winning New York-based financial writer. In addition to writing for RealMoney, he has a weekly market column on MSN Money called Company Focus, and a column called Insiders Corner at InvestorIdeas.com. Brush has covered business and investing for The New York Times, Money magazine and the Economist Group. He studied at Columbia Business School in the Knight-Bagehot Fellowship program and the Johns Hopkins School of Advanced International Studies. He is the author of Lessons From the Front Line, a book that offers insights on investing and the markets based on the experiences of professional money managers.

Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Brush appreciates your feedback; click here to send him an email.