An Insider Is Bullish on This Retailer
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Reuben Mark, who is a member of the board of directors at $4.8 billion market cap sporting-goods retailer Cabela’s (NYSE: CAB), bought 5,000 shares of the company’s stock on May 30 at an average price of $67.65 per share. Studies show that stocks bought by insiders narrowly outperform the market (read our analysis of studies on insider trading), and we think that this is because insiders have to be confident in the company to buy more stock and therefore reduce the diversification of their wealth. While imitating every insider purchase is impossible, we like to provide brief coverage of insider purchases so that investors can do further research on any interesting names.
Cabela’s has more than doubled in price over the last year, and is up over 400% in the last five years. As a sporting goods retailer, Cabela’s has benefited strongly from the higher demand for guns that has been present in the last few years (which we’d attribute, among other factors, to worries by gun owners that the federal government will soon further restrict sales of guns and ammunition).
In the first quarter of 2013, revenue rose 29% versus a year earlier, fueled by strong comp sales growth. The company specifically called out growth in hunting equipment as a key driver here. Earnings grew 73% over the same time frame last year, and cash flow from operations for the quarter was over $120 million. The market has already priced in quite a bit of further growth, and so Cabela’s trades at 25 times trailing earnings and at 17 times consensus earnings forecasts for 2014.
In addition to insider trading activity, we also maintain a database of quarterly 13F filings from hundreds of hedge funds and other notable investors. We use the information included in 13Fs to help us develop investment strategies; for example, we have found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year. Our database of filings can also be used to track interest in individual stocks, and we can see that billionaire Ken Fisher’s Fisher Asset Management reported a position of over 2 million shares in Cabela’s at the end of March (find Fisher's stock picks).
One group of peers for Cabela’s consists of general sporting goods stores such as Dick’s Sporting Goods (NYSE: DKS) and Hibbett Sports (NASDAQ: HIBB). These two stocks are also priced for moderate to high growth, with trailing P/E's in the 21 to 22 range. While Dick’s did experience 13% earnings growth in its most recent quarter compared to the same period in the previous fiscal year, performance was more modest on the top line. We’d therefore be concerned about the sustainability of this level of earnings growth, and given the high valuation would avoid the stock.
Hibbett’s revenue and earnings have actually been about flat, and while the sell-side is projecting earnings growth over the next year and a half, we would not take their optimism at face value given that recent performance has not been good and analysts are often too positive about companies’ prospects. We’d also note that 13% of the float is held short.
We’ve mentioned gun sales as a major driver of business at Cabela’s, and so we think that it’s appropriate to compare the company to gun manufacturers Sturm, Ruger (NYSE: RGR) and to Smith & Wesson (NASDAQ: SWHC). These companies have also benefited from higher gun demand in recent years, but apparently many market players think that the rise in gun sales will slow: 20% to 25% of the float at these companies is held short.
Last quarter Sturm, Ruger’s revenue rose almost 40% compared to the first quarter of 2012, with net income rising at a slightly faster rate. The forward P/E here is 18, and dividend payments- at least over the last 12 months- actually give it a high yield.
Recent growth has also been high at Smith & Wesson, and the earnings multiples there are actually fairly low - the trailing and forward P/Es are 10 and 9, respectively. With analysts expecting continued growth, this results in a low five-year PEG ratio. As such, Smith & Wesson may be a better way to play a guns-focused thesis.
We would be a bit concerned that demand for guns might plateau, however and with Cabela’s and these other companies showing high earnings multiples they would seem to count on gun sales going even higher. As such even with this insider purchase it might be a good idea to wait for another quarter or two of results rather than making an aggressive play on even more growth in net income.
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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 Sturm, Ruger & Company. 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!