Charles & Colvard, Ltd.: The Non-Blood Diamond

I believe what you wear is a reflection of who you are, and as a result I stopped wearing the diamonds that I own because they were just not worth the hassle or cost. Especially after the debut of Leo Di Caprio’s movie, “Blood Diamond”, my social activist friends were constantly criticizing me for wearing diamonds. In their opinion, my miniscule diamonds bought years ago were responsible for the financing all of the Third World oppression and genocide.

I decided to make a fashion statement that I cared about the world that I live in and took to wearing jewelry made from Moissanite. This stone costs about one tenth the price of a real diamond and has similar thermal conductivity.

When I was at my jeweler last month, he mistook on initial glance my moissanite ring for a real diamond. Moissanite is a gem quality silicon carbide. It was originally discovered in meteorites at Canyon Diablo in Arizona more than one hundred years ago. According to Charles & Colvard Ltd.’s (CTHR) website, “you have never seen a jewel on earth with more fire, brilliance, and sparkle than moissanite. Even diamond dealers concede that it has more sparkle than an average diamond."

A North Carolina company, Charles & Colvard creates this stone in the laboratory now and are the only producers in the world. A patent on the creation process affords them protection for the next ten years. As a stock jockey, I am always thrilled to buy the only producer in a field. A monopolistic producer can raise prices as he sees fit because there is no competition. This may be the reason for the current high pricing of this crystal like stone.

For many reasons, the time is right to buy Charles & Colvard stock which is trading at $4.60 down from $26 at the end of 2005. That year, sales had peaked at $43 million. The company earned spot number 54 on Fortune Magazine’s list of the 100 fastest growing small public companies in 2006.

After that, the company ran into some trouble. The Federated – May department store merger resulted in a loss of 40 outlets for the company because both Federated and May had previously sold jewelry made form moissanite. Trying to go head to head against the diamond cartel resulted in a migraine for Charles & Colvard. The diamond industry fought back with a vengeance against their marketing campaign to be the “fake” diamond. The company ended up with much excess inventory that could not be moved.

Now, Charles & Colvard concedes the market for "I love you therefore I buy diamonds" to De Beers and the other diamond dealers. Instead they are now targeting the independent woman that buys for herself. Women presently control five trillion dollars of spending each year and their economic strength keeps multiplying. You could say that this stock is a call option on women’s liberation.

While the demographics are in their favor, only 8% of the world has even heard of this stone. There is plenty of room for growth. The company has began to advertise in Allure, Marie Claire, Self and Vogue. Television commercials have sparked enough curiosity to bring potential customers through the door. Right now, the company sells through JC Penney’s, army and air force exchanges around the world, fine jewelry counters at major department stores, and some regional jewelry chains. They are test marketing products at three divisions of Zales, the largest jewelry retailer in North America.

Costume jewelry is now in fashion for women of all ages. It used to be the province of young girls but now every one is wearing fakes. For example, the Candace Bergen character on the television show “Boston Legal”, a rich successful partner in a law firm, only wears costume jewelry. Sarah Ferguson, the Duchess of York, is the new spokeswoman for Charles & Colvard.

There is not much analyst coverage of this small cap stock with a market capitalization of just $83 million. This is the preferred situation for the buyer of a thinly traded stock. You want to get in before the analysts write and raise the price.

Northland Securities, a small brokerage firm from Minnesota, just initiated coverage on Charles & Colvard with an outperform rating and a price of $8, almost double the current price.

Chris Krueger of Northland thinks that the company can eventually capture 1% of the US jewelry market and achieve $300 million in sales. But in any case, the worst is over for this company.

I am buying the stock of Charles & Colvard as a long term investment.

CTHR 1-yr chart