Take the plunge: It's time to buy the Knot
The small-cap wedding specialist is registering big gains in online-ad sales.
By Matthew Boyle

(FORTUNE Magazine) – Ah, to be young, in love, betrothed--and in a state of panic over where to find the reception hall, the bridesmaids' dresses, and the DJ. That's where wedding specialist the Knot (KNOT, $7) comes in. Founded in the dot-com froth of 1996, the Knot not only survived the bubble but has emerged as the web's go-to spot for nuptials-related content and services. With more than 2.1 million visitors a month, its flagship site (theknot.com) is attracting a passel of advertisers eager to grab their share of the $70 billion that's spent annually on weddings in this country.

That huge web presence gives this small fry (market value: $155 million) great growth potential. The Knot's online-ad revenue increased 41% in 2004 and is growing even faster this year. To broaden its appeal, the company recently added sites designed to target newlyweds (thenest.com) and singles (greatboyfriends.com). It also cut a deal with Target's gift registry--the largest in the U.S., according to NPD Houseworld--to shore up a glaring weak spot in its retail business. KNOT is currently trading at nearly 100 times its previous 12 months' earnings. But JMP Securities' Bill Morrison, the lone analyst who covers the Knot, expects profits to jump from 11 cents a share this year to 31 cents in 2006. Based on those projections, KNOT is now trading at a forward P/E of 26. "We think online media is a growth area, and the Knot is the dominant media asset in its niche," says Henry Ellenbogen, co-manager of T. Rowe Price's highly rated Media & Telecommunications fund, which owns around 200,000 shares of KNOT.

As with any union, though, saying "I do" to the Knot has its risks: Investors should keep a close eye on what occurs once retail giant Federated completes its acquisition of May Co., which has a 16% stake in the Knot. (Federated is a shareholder and partner of WeddingChannel.com, the Knot's main rival.) Should Federated sell May's shares on the open market, it could put a damper on KNOT for several months. Still, we think this wedding party is worth crashing. -- Matthew Boyle