Insiders Are Going Shopping at Francesca’s

Our database of insider trading filings shows three insiders at Francesca’s Holdings Corp (NASDAQ:FRAN) buying the stock on December 12^th 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 (find out more about studies on insider trading). 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.