Insiders Are Going Shopping at Francesca’s
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Our database of insider trading filings shows three insiders at Francesca’s Holdings (NASDAQ: FRAN) buying the stock on December 12th at prices generally between $23.20 and $23.60. CEO John Merritt bought 10,000 shares, an executive vice president bought about 4,200 shares, and Neill Davis, the company’s president, purchased 3,000 shares. The stock had already seen a round of insider buying in September (see a history of insider purchases at Francesca's). Francesca’s is a specialty retailer with a market capitalization of just over $1 billion, selling women’s clothing, jewelry, and accessories.
Studies show that, statistically, stocks bought by insiders tend to outperform the market. We think that this is partly because insiders will normally avoid buying a stock- after all, their financial situation is already tied to the company’s prospects, and diversification is rational. The exception would be if there is a good deal of confidence in the stock. Stocks seeing consensus insider purchases, it turns out, are particularly good performers on average. As a result we think that it’s a good idea to examine Francesca’s Holdings Corp more closely and see if it could be one of these winners.
The company recently filed its 10-Q for the quarter ending in October 2012 (the third of its fiscal year ending January 2013). Revenue grew by 43%, due to both an increase in the number of locations (27% higher than a year ago, with roughly the same percentage increase in total square footage) and significantly higher comp sales and revenue per square foot. Operating and net income more than doubled, bringing earnings per share to 72 cents for the year. That places the stock at 26 times trailing earnings, but we’d expect that net income will be significantly higher in the current quarter than a year ago. Analyst consensus is for 28 cents, which would pull the P/E down to 24. However, that suggests little seasonality as it would only be a small improvement on a q/q basis. The sell-side expects strong growth over the next several years, as despite this high starting point the five-year PEG ratio is 0.8.
Billionaire Ken Griffin’s Citadel Investment Group also liked Francesca’s Holdings Corp during the third quarter of the year: the hedge fund more than tripled its holdings to about 540,000 shares, though this was still a very small position compared to the fund’s size (check out Griffin's stock picks). Columbus Circle Investors, managed by Donald Chiboucis, also added shares during the quarter (see Columbus Circle's favorite stocks). However, the most recent data shows that 33% of the outstanding shares are held short, so while we can’t be sure who they are we know that a number of market players are bearish.
A number of peers are also seeing strong earnings growth. Ann (NYSE: ANN), Michael Kors Holdings (NYSE: KORS), Chico’s FAS (CHS), and Ulta Salon, Cosmetics & Fragrance, (NASDAQ: ULTA) each reported earnings growth of at least 20% in their most recent quarter compared to the same period in the previous fiscal year. Of the peer group we looked at, only Limited Brands (NYSE: LTD) seems to be struggling with revenue and net income actually down. The other four companies fall into two groups in terms of valuation: Ann and Chico’s have trailing P/E multiples in the teens, while Kors and Ulta Salon are priced closer to 40 times trailing earnings. This puts Francesca’s between the two groups, a bit below average. Ann and Chico’s both appear to be doing fairly well as far as their sales figures go, and might make better starting points for a value investor. Ulta Salon and Kors are seeing strong growth, and it’s possible that those stocks are poised to go higher as well, but given how pricy they are we think that we’d prefer to wait a couple quarters to see how their growth numbers do. Traders who have a taste for growth stocks, however, could certainly consider them.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Ulta Salon, Cosmetics & Fragrance. Motley Fool newsletter services recommend Ulta Salon, Cosmetics & Fragrance. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!