A Hot Stock That's Really Not

Maybe tough times are good for retailers that utilize a lot of black in their stores. And a few months ago, I kept seeing articles that said dark, Goth looks are coming back in. (Did they ever really go out?) At any rate, Hot Topic (Nasdaq: HOTT) proved to be a real retail oddity in that it reported better-than-expected third-quarter earnings.

Net income increased 11.4% to $7.4 million, or $0.17 per share. Revenue increased 4.7% to $197.3 million, with comps increasing 1%. Earnings beat analysts' expectations by a penny. Despite the increase in net income, while one could call the 1% increase in comps better than a lot of retailers can manage at the moment, it's still pretty tepid. (And I'm still convinced that October's strong comps at Hot Topic probably had a whole lot to do with Halloween purchases, although the company's carrying merchandise related to the currently hot Twilight books and movie is probably a longer term benefit to its business.)

At the moment, I'm sure many retail investors would take the usually kind of lame "beat by a penny" routine any day, since so many consumer-facing companies have been reporting some perfectly awful third-quarter results. Abercrombie & Fitch (NYSE: ANF) reported a bummer of a quarter, for example. Bare Escentuals (Nasdaq: BARE) delivered some scary makeup news just in time for Halloween. Crocs (Nasdaq: CROX) continued on its train-wreck trajectory.

Despite the decent quarter, investors are dropping Hot Topic's stock like a hot potato today. We may never really know why (note the company reiterated its guidance), but I'd like to think maybe people realized the reality disconnect. This is one of the few retailers with a stock price that has increased recently -- the stock had surged 24% in the last six months, in fact, as many arguably far stronger retailers' stock prices fell through the floor. I've always argued it looked quite overvalued for a company that has a history of struggling, and maybe some investors are coming to their senses.

By my calculations, Hot Topic's trading at approximately 19 times trailing earnings; needless to say, you can find far cheaper multiples for retail stocks right now, and some of them are much stronger operationally, too. Hot Topic might be worth such a crazy premium if you really thought it was prepared to outperform by a long shot, but I don't think that's likely. There are many far stronger, far more reasonably priced retail stocks that would be better choices for investors' long-term portfolios.

More Foolishness about Hot Topic:

• I covered some interesting developments at Hot Topic here and here.
• My Foolish colleague Rich Duprey took a look at some questionable stock options practices at Hot Topic.