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Two Great Retail Plays on a Consumer Rebound
By Michael Brush
Exclusively for InvestorIdeas.com
June 05, 2008
I’m not sure when employment trends will start to firm up and gasoline prices will begin to ease enough to get consumers to open their wallets again.
But insiders are strongly suggesting two ways to position our portfolios for when that happens.
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- At Dick's Sporting Goods (DKS), a Pittsburg-based sporting goods retailer, chief Edward Stack and a director purchased $1.25 million worth of stock at the end of May. They both have solid records based on purchases back in 2002 which netted them 100% gains within six months, according to Thomson Financial. That was the last time either of them had bought stock, except for a smaller purchase by the director in 2005, which brought him 9% gains within six months.
- At Shutterfly (SFLY), chief Jeffrey Housenbold, the finance chief and three directors bought $1.4 million worth of stock in May. What’s interesting here is that there was nothing but selling in this stock since last summer at prices ranging from $20 to over $33 – including by the chief and the finance chief. All that selling took place before the stock tumbled to the $13 range where insiders recently purchased. In short, insiders have demonstrated a knack for knowing when to get out. I’ll bet they have similar skills at knowing when to get in.
Consumer rebound ahead?
Before we get to more detail on these two stocks, is there any evidence the consumer might be coming back? I’d cite at least three factors that support this possibility.
First, oil is already declining since I
predicted it might last week. If this is a trend that feeds through to gasoline prices, it will obviously help the consumer.
Next, there are some signs of stabilization in the job market. The ADP employment report recently showed private sector payrolls increasing by 40,000. That was much better than consensus estimates of a decline of 30,000 jobs. The Conference Board’s Help Wanted Index recently stabilized, an improvement over the unrelenting declines during the past year. And the constant deterioration in the Monster online advertising index has eased in the past several months.
Finally, yields for five- and ten-year bonds have been moving up. This could be a sign the “bond vigilantes” are expecting higher economic growth ahead. This signal isn’t so clear, because it could also indicate they expect higher energy and commodity prices to lift the broad inflation indicators, regardless of economic growth.
But if the bout of economic weakness is bottoming here and consumers soon regain their confidence, here are two stocks that insiders are telling us should beat the group in any rebound.
Dick's Sporting Goods
Dick's Sporting Goods chief Edward Stack doesn’t agree with me that the consumer may be coming back any time soon. “We believe the consumer is very cautious and will continue to be so at least through the balance of this year,” he told investors in the most recent company conference call. He blames it on rising gas and food prices, and a “general concern” about the future.
Stack has good reason to be gloomy. His company missed first quarter earnings and lowered its outlook for the year. His stock gapped down to around $22 on this news on May 22, from around $30 in early May.
But while Stack may be negative on the consumer for the rest of this year, he’s downright bullish on Dick's Sporting Goods for the long term. He bought $1 million worth of shares at just under $22 in late May.
It’s easy to guess why he might be so bullish. Stack thinks it’s a great time for his company to take market share from competitors weakened by the economic pullback. The chain will add 44 new stores this year, on a base of 340 Dick’s Sporting Goods stores, 79 Golf Galaxy stores and 15 Chick’s Sporting Goods stores which operate in dozens of states across the country.
The company will also open its third distribution center in the third quarter. Distribution centers tend to boost retailers because they allow chains to better manage inventory.
Dick’s was founded in 1948 when the CEO’s father, Dick Stack, opened his original bait and tackle store in Binghamton, New York. Edward Stack, the CEO, owns a huge position in the company, or about 26% of the shares outstanding.
Shutterfly
Like Dick's Sporting Goods, Shutterfly traded down sharply recently, and insiders swooped in to buy lots of stock. Shutterfly stock fell to $12 recently from $18 earlier this year, after the online photo company reported a wider loss for the first quarter and guided down for the second quarter. But insiders see this as only a temporary setback, since they bought $1.2 million worth of stock in the decline.
Shutterfly’s website allows people to upload, edit, and share photos. They can also use photos to create their own personalized versions of things like calendars, greeting cards, mugs, mouse pads, and playing cards.
The last time I wrote about
a similar online company or Stamps.com (STMP), was on March 6 when that stock was at around $9. It recently traded for $15, for 65% gains in three months. This doesn’t mean Shutterfly will do the same thing, of course. But it’s a sign that insiders at online companies like these know when their stocks are cheap.
The bottom line: Edward Stack, at Dick's Sporting Goods may be right. It may take the whole year for the consumer to start perking up. He knows more about consumer spending patterns than me. But even if you have to wait a year or more, insiders are telling us these two stocks will outperform as a recovery unfolds. And remember: Stocks often move about six months ahead of any economic news that explains the stock price action.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
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