Bottom stock fishers, beware

Many stocks are looking bombed out, but that doesn't mean they are cheap.

That is because earnings estimates often haven't fallen quickly enough to reflect ever-dimmer economic prospects. Investors thirsting for growth also may pay through the nose for a mere hint of it.

The result is that some cratered share prices still represent lofty multiples of expected earnings. This is a potential trap for investors tempted to go bottom-fishing.

Some examples:

Las Vegas Sands Corp. Stock in the operator of the Venetian Resort & Casino and the Palazzo has fallen about two-thirds from its 52-week high. Yet the shares still trade at about 31 times expected 2009 earnings.

While investors typically think of casinos as recession-resistant, that may no longer be the case. Airlines already are cutting flights to Vegas.

To lure customers, casino operators are offering more generous terms for lodging and gaming. That will likely cut into profit margins even as revenue growth flags.

In a recent report, J.P. Morgan analyst Joseph Greff said the second half of the year could be the worst period for Las Vegas since the months after the Sept. 11, 2001, terrorist attacks. So, Greff recently downgraded Las Vegas Sands' earnings estimates for this year and next.

Blue Nile Inc. While jewelers have felt consumers' pain, investors still have faith in Blue Nile's ability to expand. True, the shares have fallen about 58 percent from their 52-week high. But the stock trades at about 33 times expected 2009 earnings.

Helping keep growth hopes alive: The online diamond and jewelry retailer is expanding overseas, and its Internet sales model means it doesn't tie up working capital in inventory. But neither is likely to offer enough protection from a sharp U.S. downturn.

Already, the effects of a slowdown are starting to show. Unique visitors to Blue Nile's sites were down 5 percent and 29 percent in April and May, compared with the same months a year earlier, according to a recent Citigroup report.

That makes Blue Nile's share-price multiple look too rich, even if the economy just muddles along for the next 12 months. If bleaker economic prognostications are more on target, that multiple could prove to be wildly out of line.

GSI Commerce Inc. The e-commerce and interactive marketing concern, whose stock has more than halved from its 52-week high, trades at more than 60 times 2009 estimates.

GSI has some insulation from a downturn because many of the retail clients for which it provides outsourced services lock into long-term contracts. But signing new partners could prove more difficult, and there isn't any guarantee that all its existing clients will survive the downturn even though most are big, established players who should weather the storm.

That could threaten GSI's growth, which in turn could hamper efforts to turn free cash flow positive. GSI has a spotty record of free cash-flow generation, largely because it has had to spend heavily to develop its technology. Yet the current share price and multiples of earnings bake in overly optimistic expectations.

Bottom line: Paying for growth in a no-growth environment is probably a losing bet.