Reuben Mark, who is a member of the Board of Directors at $4.8 billion market cap sporting goods retailer Cabelas Inc (NYSE:CAB), bought 5,000 shares of the company’s stock on May 30th 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.
Cabelas Inc (NYSE:CAB) 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, Cabelas Inc (NYSE:CAB) has benefitted 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, 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 Cabelas Inc (NYSE:CAB) 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 Cabelas Inc (NYSE:CAB) at the end of March (find Fisher’s stock picks).
One group of peers for Cabelas Inc (NYSE:CAB) consists of general sporting goods stores such as Dicks Sporting Goods Inc (NYSE:DKS) and Hibbett Sports, Inc. (NASDAQ:HIBB). These two stocks are also priced for moderate to high growth, with trailing P/Es in the 21-22 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 Sports, Inc. (NASDAQ:HIBB)’s business has 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. 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 Sturm, Ruger & Company (NYSE:RGR) and to Smith & Wesson Holding Corporation (NASDAQ:SWHC). 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 & Company (NYSE:RGR) 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 twelve months- actually give it a high yield. Recent growth has also been high at Smith & Wesson Holding Corporation (NASDAQ:SWHC), and the earnings multiples there are actually fairly low. 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, and the stock certainly looks worthy of further research at this pricing. Cabela’s could also benefit from this continued trend, of course, and the earnings multiples are high enough that we could also consider it as a growth stock, but it might also be a good play to wait for another quarter or two of results.
Disclosure: I own no shares of any stocks mentioned in this article.
