BGFV could be a small-cap gem of a value

One of the open questions of the past year has been about the point in time where questions, discussions and commentary about the economy and the world don’t continue to revolve around the pandemic. That question remains unanswered, but as an analyst, part of my job is to sift through the relentless, constant stream of opinion, data, and headlines we all get to see on a daily basis to identify signs where conditions might be about to change.

That is much more an art than anything else, and as with all artistic endeavors, the interpretation and appreciation of that process is usually, completely subjective and unique only to the observer. That’s why I take the opinions offered by most analysts and “experts” with a grain of salt. Even so, sometimes there is information that I think is better than others, and in the context of current health and economic conditions, that can be an early sign that just maybe there is change on the horizon.

In the last few days I’ve noticed an increasing amount of commentary about inflation. Coronavirus didn’t go away, and neither did questions about things like unemployment, vaccine distribution and administration, and so on. This week, the market has seemed to become a bit more uncertain; Fed chair Jerome Powell reaffirmed the Fed’s ongoing accommodative stance towards monetary policy even as he described the economic recovery from last year’s bear market, recessionary lows as faster than expected. Bond yields have also been creeping up, adding to speculation about inflationary concerns. It suggests that analysts and investors are starting to think about the path ahead in more objective and critical terms. Whether that is a good thing or bad thing is still unknown, but I also think this marks a shift that could be important.

Increasing inflation sounds scary, but by itself, and in the early stages of recovery, it is also typical of a reversal from economic slowdowns and a sign that the economy is returning to growth. That is usually a positive thing, and the Fed has indicated for years now that its primary benchmarks come from information about unemployment and consumer prices. Powell’s recent statements have made clear that the Fed doesn’t see the kind of inflationary growth that some have wondered about; consumer prices in the broadest sense indicate that inflation remains below the 2% long-term target they’ve set, with a long road ahead to push unemployment down off of levels that are still above the peaks seen in the Great Recession more than a decade ago. That means, not surprisingly that the Fed is going to continue to maintain its current accommodative policy.

That anticipation of a “return to normal activities” has pushed a lot of stocks that make up the sectors and industries that personify some of those activities into long upward trends over the past year. That usually means that for value investors, this stocks become less attractive and less practical – but there are exceptions. Big 5 Sporting Goods Corp. (BGFV) is an interesting example. The stock fell below $1 per share in 2020, but from that point has rebounded to a high earlier this week at around $18 per share. This is a small-cap company that is showing fundamental strength in more than a few of my core metrics, and despite the impressive rise in price, also still carries an interesting value proposition. Let’s take a look.

Fundamental and Value Profile

Big 5 Sporting Goods Corporation is a sporting goods retailer in the western United States. The Company offers a range of products in a sporting goods store format. The Company also offers products online through its e-commerce platform. The Company’s product mix includes athletic shoes, apparel and accessories, as well as a range of outdoor and athletic equipment for team sports, fitness, camping, hunting, fishing, tennis, golf, winter and summer recreation, and roller sports. The Company purchases merchandise from sporting goods equipment, athletic footwear and apparel manufacturers. It offers various brands, such as adidas, Coleman, Footjoy, JanSport, Rawlings, Spalding, Asics, Columbia, Franklin, Lifetime, Razor, Speedo, Bearpaw, Crocs, Gildan, Mizuno, Rollerblade and Timex. The Company operated 432 stores and an e-commerce platform under the name Big 5 Sporting Goods, as of January 1, 2017. BGFV has a current market cap of $309.3 million.

Earnings and Sales Growth: Over the last twelve months, earnings increased nearly 2,000% (not a typo), while sales improved by more than 19%. In the last quarter, earnings declined by -36.5% while sales were flat, but negative at -4.71%. The company’s margin profile is healthy and strengthening, at Net Income versus Revenue was 5.37% over the last twelve months, and improving to 7.23% in the last quarter.

Free Cash Flow: BGFV has healthy free cash flow of almost $143.15 million over the last twelve months. This number was also just $5 million at the beginning of this 2019, making Free Cash Flow growth a useful benchmark for this stock. Their current Free Cash Flow number translates to a useful Free Cash Flow Yield of 46.5%.

Debt to Equity: the company’s debt to equity ratio is .01, which is very low and is reflected in the company’s balance sheet. As of the last quarter, cash and liquid assets were $64.65 million with minimal long-term debt. Along with the positive pattern of Free Cash Flow and their strengthening operating profile, BGFV has excellent liquidity.

Dividend: BGFV pays an annual dividend of $.60 per share, which translates to a very attractive annual yield of 4.27% at the stock’s current price. Their payout ratio is also conservative, at less than 25% of earnings.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $15 per share. That means that at the stock’s current price, it is modestly undervalued, with 7% upside from its current price.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The chart above displays the stock’s price performance over the last year. The diagonal red line traces the stock’s upward trend from its bear market low last March below $1 to its peak earlier this month at around $17. It also informs the Fibonacci retracement lines shown on the right hand side of the chart. The stock is currently retracing off of that high, and appears to be nearing support around $12.50 per share. If it can pivot at this level and start to move higher again, its immediate resistance is at around $15, with $17 possible if bullish momentum starts to increase. A drop below $12.50 has relatively limited downside, with next support sitting at about $11 where the 38.2% retracement line sits if bearish momentum increases.

Near-term Keys: BGFV’s fundamentals are very solid. I also think that the company offers products that are useful in any economic environment, and in particular could position this company well if the long-awaited “return to normal” continues; however I also think that long-term recessionary economic conditions could dampen demand and keep pressure on revenues. That means that while the value proposition is interesting, long term upside is limited, which means it might be smarter to wait and see if the stock drops to a more useful bargain price at around $12. If you prefer to work with short-term trading strategies, a pivot low off of $12.50 could offer a useful opportunity to buy the stock or work with call options, using a range between $15 to $17 acting as a good profit target. A drop below $12.50 could be a good time to consider shorting the stock or buying put options, using $11 as a useful, early profit targets on a bearish trade.