Editor's Choice

As Spring Hits, Should You Buy These Outdoor Retailers?

Bob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Slowly but surely, the days get longer and the temperature gets warmer. Outdoor retailers have been on an absolute tear as of late, and now that spring is finally near, could be primed for further gains. These stocks aren’t lacking high growth rates and have some lofty valuations to prove it. If you’re an investor who enjoys both the outdoors and stocks that offer outsized gains, these stocks might already be on your watch list. The question now is whether the rally in these names has room to run, or if you’d be better off letting your money hibernate for a while before jumping in.

Great stocks for the great outdoors

Cabela's Incorporated (NYSE: CAB) operates as a specialty retailer and direct marketer of hunting, fishing, camping, and related outdoor merchandise. The company reported record fourth-quarter results, of comparable store sales growth of 12% and 18% growth in earnings per share year over year. Cabela’s produced an excellent after-tax return on capital of 15.9% for full-year 2012.

Cabela’s full-year results were equally impressive. Net income increased 29.5% to $195 million compared to $151 million last year, and earnings per diluted share were $2.72 compared to $2.12 a year ago. The stock’s performance has followed suit with its operating results. Shares of Cabela’s have more than doubled since the beginning of 2012.

Dick’s Sporting Goods (NYSE: DKS), as its name implies, sells sports apparel and equipment, as well as hunting accessories, and is about twice as large as Cabela’s by market capitalization. The retailer reported solid 12% sales growth through the first nine months of 2012, and diluted earnings per share rose 5% during the same period. Shares of Dick’s have rallied almost 40% since the beginning of 2012, and are only a few dollars per share away from its all-time high. Furthermore, Dick’s has a solid balance sheet, with almost as much cash on the books as long-term debt.

Home Depot (NYSE: HD), the biggest home improvement store chain in the country, jumped 6% higher on Feb. 26 after reporting that its fourth-quarter net income rose 32% on the strength of U.S. sales and the cleanup that followed Superstorm Sandy. In addition, rising home sales and consumer confidence also played into the thesis that Home Depot’s business is thriving.

Home Depot reported sales of $18.2 billion for the fourth quarter of fiscal 2012, a strong 14% increase from the fourth quarter of fiscal 2011. Earnings per diluted share in fiscal 2012 were $3, compared to $2.47 per diluted share in fiscal 2011, an increase of 21.5% year over year.

Are these stocks decent bargains?

With regard to where these shares trade now, it’s hard to make the case that any of these three stocks are undervalued. New investors are paying more than 20 times the trailing earnings per share for all three. In addition, you’re not getting much downside protection in the form of dividends. Unlike its competitor Cabela’s, Dick’s Sporting Goods pays a dividend to shareholders of about 1% at recent prices. Home Depot pays the biggest dividend of the three, with a yield of slightly more than 2%. A dividend yield of 2% is nice, but about on par with the yield of the broader market.

In any event, as long as these companies grow strongly at the rates they’ve enjoyed recently, investors should be fine. However, a hiccup in the economic recovery in the United States could cause these shares to tumble. I'm usually wary of buying in as stocks reach record highs. I prefer to get in when I see a meaningful margin of safety, which isn't very pronounced for any of these stocks. While these are solid companies, I’d wait for a better opportunity before jumping in.

Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Home Depot. 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!

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