Nine Winning Sports Stocks as We Enter Championship Season

by: Money Morning

By Jason Simpkins

After all of the buildup, Super Bowl XLV is finally in the history books. But the fact that America's new favorite pastime is now in hiatus doesn't mean the world of sports will stop spinning. In fact, a number of high-profile sporting events will take place in the next few months:

  • Major League Baseball Spring Training starts on Valentine's Day, Feb. 14, with the season set to open on March 31.
  • That coincides with the NCAA basketball tournament affectionately known as "March Madness," which starts March 15-16.
  • The National Hockey League's regular season comes to an end on April 10, paving the way for the start of the Stanley Cup Playoffs.
  • The National Basketball Association ends its regular season on April 12, with the playoffs running into June.
  • And the PGA's Masters Tournament runs from April 7 to April 10.

Indeed, the Super Bowl is really just the kick off to the 2011 championship season. So what better time could there be to talk about sports stocks?

You don't need to own a pro sports franchise to make money from athletics. In fact, you can more than pay for your season tickets by simply investing in the right stocks. And there are plenty to choose from.

There are three principle types of sports stocks:

  • Apparel Makers.
  • Sports Retailers.
  • And Media Companies.

Here's a look at all three...

Suiting Up

When looking at sports stocks, apparel makers - the companies that make the clothing, shoes, and equipment for athletes - are the most obvious investment candidates. These include large, well-known companies like NIKE Inc. (NYSE: NKE), Under Armour Inc. (NYSE: UA), and Quiksilver (NYSE: ZQK), as well as smaller, more obscure brands like Lululemon Athletica Inc. (Nasdaq: LULU) and LaCrosse Footwear Inc. (Nasdaq: BOOT-OLD).

Nike may have the strongest brand in all of sports, and it's long been a Wall Street darling. The company has grown average annual sales and earnings per share (EPS) by 4.6% and 7.2%, respectively, over the past three years. Its stock, which has a 1.5% dividend yield, has gone up nearly 50% in that time.

Nike reported results for its fiscal 2011 second quarter in December: Revenue rose 10% from the year prior to reach $4.8 billion. Earnings per share for the quarter were up 24%. And futures orders, which are scheduled for delivery from December 2010 through April 2011, totaled $7.7 billion - an 11% increase.

Nike, which generates 50% of its sales from outside the United States, again proved to be a global champion. Reported futures orders climbed 18% in China, 9% in Central and Eastern Europe, and 15% in its designated Emerging Markets segment.

Nike's stock has run up more than 14.5% in the past six months, but most analysts still have it rated as a "Buy." Goldman Sachs Group Inc. (NYSE: GS) took Nike off of its "Conviction Buy List" on Jan. 3, but still maintains its "Buy" rating on the stock with a $95 a share target. Both Barclays PLC (NYSE ADR: BCS) and Credit Suisse Group AG (NYSE ADR: CS) have a $100 price point for Nike stock, which closed Friday at $85.74.

Lululemon is another hot sports apparel company - though it doesn't have the same unanimous support among analysts as Nike. The Vancouver-based purveyor of yoga attire has seen its stock surge 60% in the past three months, and it's up tenfold from where it was in January 2009.

Lululemon started out selling high-end yoga apparel for women in Canada, the United States and Australia. Now with more than 130 retail outlets it's branching out to general fitness and men's apparel. The company offers yoga classes in its stores, has a regular online blog, and in many ways has succeeded in making workout wear fashionable - especially among the twenty-something set.

Lululemon really caught analysts' attention last month, when it raised its guidance for its fiscal 2010 fourth quarter. The company now expects net revenue to be in the range of $237million to $239million, compared to a previous projected range of $210million to $215million. Lululemon expects a 20% increase in same store sales for the current quarter. And the company has reported revenue increases of 29% and 28%, respectively, in the past two fully reported years.

Of course, now that its stock has more than doubled in the past year, Lululemon may be a victim of its own success. The company's stock carries a lofty Price/Earnings (P/E) ratio of 53.64.

"The biggest risk right now is valuation," Liz Dunn, an analyst with FBR Capital Markets Corp. (Nasdaq: FBCM) told Reuters. "With the stock trading where it is, it's vulnerable to any sort of slowdown in trend."

Still, the company has found a comfortable niche and thoroughly dominated it. No serious competition has emerged. "I really don't see competition as a huge risk in the near term," said FBR's Dunn. "So far none has really been able to weaken Lululemon's sales trends."

If you're looking for some sleepers, you might consider Johnson Outdoors Inc. (NYSE: JOUT) and LaCrosse Footwear Inc. (Nasdaq: BOOT-OLD).

Johnson Outdoors on Friday posted a narrower loss than analysts expected for its fiscal first quarter. Sales also beat expectations amid a recovery in outdoor recreational markets.

The company, which makes outdoor products such as canoes, boat motors and diving equipment, typically has its best months in the summer. Recently, it has seen revenue return as consumers loosened up on big-item discretionary spending.

Johnson Outdoors reported a loss of $1.2 million, or 13 cents a share, for the quarter ended Dec. 31, compared with a year-earlier loss of $4.2 million, or 45 cents a share. Sales climbed 12% to $78.7 million. Analysts polled by Thomson Reuters most recently expected a 32-cent loss on $74 million in sales.

Meanwhile, LaCrosse Footwear stock surged some 15% this week after the company posted a 71% increase in fourth-quarter profit and a 25% jump in full year income.

Racing Retailers

In addition to the companies that make sports apparel, you might also want to look at the companies that sell sports apparel.

Dick's Sporting Goods (NYSE: DKS), Hibbett Sports Inc. (Nasdaq: HIBB), and Foot Locker (NYSE: FL) are three prominent purveyors.

All three of these companies stocks have performed well over the past year:

  • Dick's is up 68.5%
  • Hibbett is up 52%
  • And Foot Locker is up 58%

Dick's hit a new 52-week high on Friday, with the stock trading as high as $38.37, before closing at $38.22.

As of Jan. 30, 2010, the company operated 419 Dick's Sporting Goods stores in 40 states and 91 Golf Galaxy stores in 31 states. After reporting net income of $26.7 million for the third quarter ended Oct. 30, the company raised its fourth-quarter and full-year guidance to $1.56 to $1.58 per diluted share.

However, Dick's has agreed to pay as much as $15 million to settle a host of class-action lawsuits that had alleged a failure to pay overtime and other promised wages. That will be reflected in a pretax charge in the company's fourth quarter.

A better choice might be Foot Locker. Foot Locker has been particularly volatile of late, which means you stand a good chance of picking it up at a discount. It has a P/E ratio of 21.4 - compared to 28.15 for Dick's - and it offers a 3.3% dividend yield. That's the third-highest dividend payout among apparel retailers, behind Hot Topic Inc. (Nasdaq: HOTT) and Christopher & Banks Corp. (NYSE: CBK). Morgan Stanley (NYSE: MS) last month upgraded Foot Locker stock to "equal-weight" from "underweight."

Hibbett - which has more stores (760) than Dick's, but locations in just 24 states - is the wildcard. Like Foot Locker, Hibbett shares have been kicked around recently and could be ripe for a rebound. Like Dick's, Hibbett boosted its earnings guidance for fiscal 2011 in November to a range of $1.63 to $1.66 per diluted share.

Indications are that the company logged strong sales following the BCS National Championship game, which featured the University of Auburn and University of Oregon. Auburn fans flocked to the store following their team's victory, snapping up championship apparel. "Before the game was even over we had people in the parking lot waiting to get in here," Chastity Robbins, a Hibbett's store manager in Brewton, Ala.,told the Brewton Standard. "We did over $4,000 in two hours. We stayed open until 1:30 a.m. after the game and it was busy."

Media Medalists

Finally, media companies, which broadcast sporting events then sit back and suck in the advertising revenue, make a lot of money off of big-time sporting events.

The 2010 Super Bowl brought CBS Corp. (NYSE: CBS) an estimated $205.2 million in ad revenue. Over the past 10 years, advertisers have paid $1.62 billion for commercial spots during the Big Game. The top five Super Bowl advertisers over the past decade have spent $592 million on advertising during the game, accounting for 36% of total advertising revenue. Of course, the Super Bowl is hardly the only game in town.

The NCAA basketball tournament brought CBS $177.2 million in television advertising revenue last year, while online advertising brought in nearly $40 million in revenue. Perhaps that's why CBS and Time Warner Inc. (NYSE: TWX) teamed up to pay $10.8 billion for the rights to broadcast the tournament until 2024.

CBS stock is up 55% in the past year and more than 14% in the past month. It has a P/E ratio of 28 and a dividend yield of about 1%. Deutsche Bank AG (NYSE: DB) last month upgraded CBS to "Buy" from "Hold." Deutsche Bank has boosted its price target for the stock from $18 to $23. "CBS's shares have had a terrific two years given the company's high exposure to advertising and high financial leverage at the trough (3.5x)," the bank said. "Nevertheless, from here we see 19% upside to $23, worthy of a ‘Buy' rating."

The Walt Disney Co. (NYSE: DIS) is another major broadcaster, owning network broadcasting company ABC as well as ESPN. Disney had such a good 2010 that Chief Executive Robert A. Iger commanded a 35% raise in salary and bonuses. Iger's salary and bonus reached nearly $16.3 million in 2010, up from $12 million a year earlier. His total compensation, including equity awards, reached $28 million, according to the company's proxy filed last month with the U.S. Securities and Exchange Commission (SEC). The board of directors' compensation committee said the raise was warranted based on the fact that three of Disney's cable channels - Disney Channel, ESPN and ABC Family - delivered record ratings, and two feature films - "Alice in Wonderland," and Pixar Animation's "Toy Story 3" - reaped $1 billion in global box-office receipts.

Disney stock is up 8.6% year-to-date, and like CBS, pays a 1% dividend. Its annual cash dividend was raised to 40 cents a share in December, from 5 cents a share the year prior.

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