by Will Ashworth | February 4, 2014 10:36 am
A year ago, I wrote about three leisure stocks I thought were going to stand out from the rest of the stocks held by the PowerShares Dynamic Leisure and Entertainment ETF (PEJ).
One year later, my three leisure stock picks have achieved a total return of 30.8% through Jan. 29, four basis points greater than the PEJ and well ahead of the SPDR S&P 500 (SPY), which gained 20.6% over the same period. I’ll score that as a win.
Late in December, Forbes‘ Kurt Badenhausen published a piece that looked at The Best And Worst Sports Stocks Of 2013, a collection of 37 stocks that averaged a 53% return in 2013. Many of them are what I would consider leisure stocks.
This year, rather than pick from the PEJ, I’ll pick from the stocks Kurt has list instead to try to find three leisure stocks that can keep the rally going.
If you haven’t being paying attention to Arctic Cat (ACAT) early in 2014, you should know that this small-cap stock has taken a 26% haircut in the first month of the year thanks to an earnings report that significantly missed the mark.
The investor uncertainty created by a 44-cent earnings miss is understandable, especially when it was followed by a downward revision in its 2014 guidance. Originally expecting annual earnings of at least $3.27 per share, ACAT stock lowered its guidance to $2.90. That’s never a good sign.
However, its fundamental business is still very sound, led by good sales of its Wildcat side-by-side vehicles. Its all-terrain vehicles (includes side-by-sides) delivered 12% revenue growth year-over-year in the third quarter. Nine months into its fiscal year, ACAT posted sales growth of 7% year-over-year for ATVs, and reasonably strong sales are expected in Q4. The same holds true in 2014.
By almost every valuation metric, ACAT stock is cheaper than Polaris (PII), its much bigger competitor. While I like PII stock I’m going with Arctic Cat because any positive surprises in 2014 will most certainly boost ACAT stock. Having said that, be prepared for some more volatility over the next 11 months, as market concerns could take a toll on leisure stocks.
In business since 1938, Columbia Sportswear (COLM) has become a global brand when it comes to active outdoor apparel and footwear, and a winner among leisure stocks.
In early January, the outdoor apparel company unveiled the Olympic uniforms for the U.S., Canadian and Russian freestyle ski teams. Columbia did such a good job with the Canadian uniforms at the Vancouver games in 2010, it was a natural choice to sponsor the U.S. and Russian teams.
COLM stock had a good year in 2013, up 49.3%, following on a 16.5% gain in 2012. However, its stock has been on a rocky road for some time. In the past decade, COLM stock has underperformed the S&P 500 on six occasions, but when it does beat the index, it tends to do so by a wide margin.
In 2013, COLM stock beat the index by 17 percentage points. Over the long-term, COLM stock has performed admirably, achieving a 15-year annualized total return of 13.9% — almost 10 percentage points higher than the index. As with most good stocks, the longer you hold, the better your return.
I like COLM stock because it seems to be able to deliver profits even when sales are in decline, regardless of the economic climate. That’s rare among leisure stocks. The momentum it gained in 2013 should continue in 2014.
Kevin Plank’s business is operating very effectively these days. Under Armour’s (UA) fourth quarter results were a blowout, with EPS of 59 cents — six cents better than the Capital IQ consensus estimate. Revenues increased 35% year-over-year to $683 million, which was $63 million higher than the consensus estimate.
Looking ahead to 2014, Under Armour expects to generate operating income of at least $326 million — 23% higher than in 2013. All of this put some pop in UA stock, which is good news for shareholders because until the huge jump post-earnings, it was in the hole by 2.4%.
Initially, I thought Nike (NKE) was the safer bet because UA stock has achieved annual total returns of 80%, 35%, 31%, 101% and 14% in each of the last five years, outperforming NKE on annualized basis by 28%. The gravy train has to end sometime doesn’t it? But even with the big gains Jan. 30, UA stock is just getting started in 2014.
As a company, Under Armour is hitting its stride. In 2013, it generated $2.33 billion in revenue, eclipsing $2-billion mark for the very first time while delivering the 15th straight quarter of at least 20% growth. It expects to hit $4 billion by the end of 2016.
Whether it be apparel or footwear, men’s or women’s, UA expects significant growth over the next three years. I see it blowing through that number and coming in closer to $4.5 billion by the end of 2016. At a 12% operating margin and a 37% tax rate, if it hits my high-end projection, UA stock will generate $3.15 in earnings per share in 2016 — 110% higher than today.
Of these three leisure stocks, UA stock in my opinion is the best bet from Badenhausen’s list of 37 stocks to outperform in 2014 (excluding the gains from Jan. 30). ACAT and COLM should also do well, but they won’t keep pace with UA.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
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