This Stock Is Unalloyed Trouble

As we've done in the past, we want to alert you to a stock trading under $10 that fails to pass our proprietary rating system.

There are a lot of "cheap" stocks in tech right now, but Alloy (ALOY Quote) isn't one of them. The company, marketed as an online-gathering and shopping hangout for the 57 million teenagers classified as Generation Y, has been disappointing investors for years and has failed repeatedly to live up to even its own expectations. The company reported its fiscal first-quarter earnings this morning, and the stock is trading down 12% to $3.64.

The stock initially found its way on to our screen as a low-dollar way to gain exposure to the online retail business and, on the surface, the business model is quite compelling. Alloy is well positioned to sell its merchandise to "Gen Y" through its online sites and catalogs, and Harris Interactive YouthPulse reports that Generation Y has annual income of $211 billion and spends $172 billion a year. And the high traffic on the company's Web sites gives it some negotiating leverage to boost top-line growth through advertising sales.

But in the face of this seemingly solid strategy and expanding potential market, management has managed to erode shareholder value over the past few years, and the stock has reacted in kind, dropping from a peak of about $20 in 2002.

How Did It All Go Wrong?

The company has kept M&A departments very busy with its goal to increase reach through acquisitions. Since 2001, the company has made a total of 12 deals, with a total value of about $280 million, or 1.58 times Alloy's current market value of $177 million.

Unfortunately, it looks like the investment bankers were the ones who made out the best, and current shareholders are now suffering through a money-losing transition period that has undermined any bull case that could be made about the company's balance sheet or growing top line.