Barron’s analyst Tiernan Ray says SELL Blue Nile.

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IN TIME, SHARES OF ONLINE JEWELER Blue Nile should turn from a lump of coal into a gem. Just don’t expect the magical transformation to happen anytime soon.

a. After a 50% decline in Blue Nile’s shares in the last 12 months, there could still be substantial downside as the contours of the U.S. economic downturn continue to come to light.

b. As consumers file for unemployment compensation in rising numbers, see their home values continue to retreat, and put up with lower lines of credit, they’re increasingly ratcheting down their purchases of discretionary items such as the baubles that Blue Nile sells.

c. the stock trades at an eye-popping 33 times next year’s expected earnings per share, even after its collapse.

d. To make matters worse, there’s new competition for investors’ attention.  Zales, which dates back to the 1920s, is a chain of shopping-mall jewelry stores. It is emerging out of several years of declining sales and profit with a new CEO and a restructuring plan, driving up its stock by 24% in the 12 months Blue Nile has fallen apart.

e. Blue Nile typically has its largest quarterly results in the December quarter, when holiday buying brings in about a third of its annual sales. But the holidays may not bring much cheer this year as things get worse with the U.S. economy, where Blue Nile gets about 90% of sales.

CONCLUSION:Until the smoke clears on the U.S. economic slowdown, and a clear picture emerges of overseas economic health, a pricey retail stock like Blue Nile is one stone better left unturned.