Capitalizing On The Run-Up In Sporting Goods Stocks

 |  Includes: BGFV, CAB, DKS, HIBB
by: Justin Kuepper

Sporting goods stocks have significantly outperformed the broader market. In fact, TickerSpy's Sporting Goods Retailer Stocks index has beat the S&P 500 by 27.2% over the past month and 147.3% since the beginning of 2008. Of course, the big question is whether or not this rally will continue and what price investors must pay for exposure to the sector.

The four stocks included in TickerSpy's index are:

  1. Big 5 Sporting Goods Corporation (NASDAQ:BGFV)
  2. Cabelas Inc. (NYSE:CAB)
  3. Dicks Sporting Goods Inc. (NYSE:DKS)
  4. Hibbett Sports Inc. (NASDAQ:HIBB)

Olympics & Other Driving Factors

The two strongest performers in the industry have been Cabelas and Hibbett Sports, which are both trading up more than 140% from their 52 week lows.

Cabelas is a leading direct marketer of hunting, fishing, camping and related outdoor merchandise. Last quarter, the company's revenues jumped 6.3% to $624 million, but its operating income was the real growth story, jumping by more than half. The 220 basis point improvement was attributed to higher gross retail margins and financial services exposure.

Hibbett Sports operates sporting goods stores in small to mid-sized markets in 26 states, with approximately 835 retail stores, 19 athletic shoe stores and one superstore. Last quarter, the firm's sales jumped 14.4% to $232.9 million, while its gross margins also improved from fewer company-wide promotions and better cost and inventory management.

From these two cases, it appears that sporting goods companies are experiencing both increased sales volume and better pricing power compared to the prior year. Some investors attribute this to the Olympics driving more sales, while others believe that these sales are due to the general populating engaging in more "free" outdoor entertainment to save on costs.

Fairly Valued Given Growth Rates

Despite their run-up, many sporting goods stocks trade at reasonable valuations given their enhanced growth rates. Some indicators even suggest that these stocks may be undervalued, although investors should consider that completion of the Olympics could negatively impact sales down the road, if that is in fact a driving factor behind sales increases.

Cabelas trades with a price-earnings ratio of 20.28x, which is higher than the S&P 500's 16.08x multiple. Moreover, the stock is trading roughly 72% over its historical valuation on a price-earnings basis. But, the stock also has a price-earnings to growth ratio [PEG] of around 0.72, suggesting that it may be undervalued given its growth rate.

Hibbett Sports is perhaps one of the most overvalued stocks in the sector, with a 2.2 price-to-sales ratio (compared to CAB's 1.1x ratio) and a P/E ratio of 26.36x (compared to the industry's 20-21x multiples). But again, the company's strong growth suggests that the higher valuation could be justifiable, if it continues moving forward.

Big 5 Sporting Goods is one of the cheapest plays in the sector, with a 0.19x price-to-sales ratio, a 20.51x price-earnings multiple and a 1.13x price-book multiple. However, the company's growth hasn't been nearly as robust as others in the sector, and its share price performance hasn't been impressive either, dropping more than 20% so far this year.

Capitalizing on the Growth

Investors looking to capitalize on the sporting goods sector may want to consider limiting their risk through the use of stock options. For instance, writing short-term call options against an existing stock position can generate premiums. These premiums can reduce the position's breakeven point over time, with the only risk being the prospect of selling early at a profit.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.