Sharper Image: Don't Ignore Insider Buying

At Ambitious Investor, we often try to identify stocks that fly below the radar, so when Wall Street determines the company presents a unique opportunity, we stand to profit tremendously. Our newest pick is Sharper Image Corp. (SHRP). Sharper Image is multi-channel specialty technology retailer. I am sure most of our readers are familiar with the company's products, as not a single holiday season goes by without receiving the gift of a pen that talks, a digital photo frame, or an ionic breeze purifier. . . Or better yet, an alarm clock that is waterproof, tells you the time in Malaysia, plays music, gives you the weather, and makes you coffee!

Now looking at the SHRP's chart, it is needless to say that those who have been long on the stock until now have little to be excited about. After all, the company has posted a loss for five quarters in a row, got into a heated battle with its ex-CEO, has a nice heap of debt, guided lower for the remainder of the year, and has been the subject of a few class action lawsuits. Shares have slipped from $12.50 in June down to $2.68 today. That said, we think it is safe to say that virtually all of the bad news has been priced into the stock, and being on the heels of the holiday season, there is very little downside from here on.

So what do we like about the stock? Well for one, it has made large efforts to expand their online sales presence, with online purchases now comprising of 16% of sales versus a year ago of only 10%. Internet shopping has continued to grow at a torrid pace, as indicated by solid recent earnings reports from leading online retailers such as Amazon (AMZN), Blue Nile (NILE), Overstock.com (OSTK). But what makes Sharper Image different from these larger companies? Sharper Image sales figures indicate that their business is almost purely seasonal, with the bulk of their yearly sales being derived from the holiday season. This is unlike the other online retailers mentioned earlier, as their sales figures show much more stability throughout the year. But given that we have been in the worst 9 month of the year for SHRP, we are able to get in the stock cheap relative to earlier valuations. Further, the company created a brand licensing division in February 2007, so we have yet to see what effect this new model will have on their holiday sales. In fact, it is licensing that produces more substantial margins than virtually every other aspect of their business, so this new division may in fact be what shoots holiday season revenues higher than previous years.

But the largest reason we find these shares once again attractive is the huge insider buying. Insiders can sell for many different reasons, and not necessarily just because they feel the company's shares are overvalued. But what we do know is that when insiders buy, they obviously have a reason to believe that the stock price is going to appreciate. After all insiders have the best picture of what is going on at the company, and their buying indicates that they really do see value. Not only are insiders are buying, but they have bought a collective total of 224,000 shares over the past week. Considering the company has only 15.1 million shares outstanding, that is pretty substantial!

How to play it: We recommend SHRP as a short term trade. We are still skeptical about the company's ability to generate consistent sales year round, thereby preventing us from taking a long term position. But with their highest volume part of the year rapidly approaching and a number of insiders aggressively buying the stock, we will hold this stock through the holiday season.

Disclosure: Author has a long position in SHRP

Comments

[Love to short]

Another great pick. There are not many other retailers out there that have seen 30% price appreciation over the last month. I didnt have a chance to buy in early, would you still consider buying at these levels?