There are many indicators used by investors in the financial world today. One of the most underappreciated forms of analysis is insider trading sentiment. In most cases, individuals would be wise to consider the transactions performed by employees or board members within a specific company, because they have been proven to outperform the market by an average of 7 percentage points a year over the past half-century.
While it is technically illegal to profit from market moving information before it is made public, it is nearly impossible for prosecutors to detect every single case of insider trading. In most situations, insiders are able to outperform the market simply because they are more familiar with their industries than retail investors are. Consider these statistics: there were over 200,000 insider transactions in 2010 alone, of which, 5 were prosecuted by the SEC. The remaining stock trades were actionable market signals, that individuals can track for free in our insider trading database.
In 2012, we’ve seen insider trading in every sector of the economy, from technology to utilities, though one company that has seen a rash of transactions in recent months is Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL). Cracker Barrel, as it is known to its customers, is a U.S. restaurant chain that is known for its country theme, and its walk-in gift shops. Most Cracker Barrel franchises are located on the edge of interstate highways – a strategy that has proven successful since the company’s founding in 1969.
Shares of Cracker Barrel have been a splendid investment over the past 12 months, returning 63.9%. This price appreciation has outpaced the restaurant industry’s average (14.9%), and competitors like Darden Restaurants, Inc. (NYSE:DRI) at 23.0%, Jack in the Box Inc. (NASDAQ:JACK) at 36.8%, The Cheesecake Factory Incorporated (NASDAQ:CAKE) at 35.2%, Bob Evans Farms Inc. (NASDAQ:BOBE) at 19.5%, and Denny’s Corporation (NASDAQ:DENN) at 36.0%.
Over this same time, one prominent Cracker Barrel insider has purchased shares of the company; below is a detailed account of these transactions.
Sardar Biglari: Mr. Biglari is the Chairman and CEO of Biglari Holdings Inc. (NYSE:BH), a holding company with a variety of restaurant-related investments. He is known as an activist shareholder, most recently for his involvement in Steak ‘n Shake. Biglari currently owns about 17% of Cracker Barrel’s outstanding shares of common stock, and filed a 14A proxy request with the SEC last week in an effort to become a board member, pending shareholder approval. On September 17th and 18th, Biglari upped his stake in the restaurant company by 26,528 shares worth nearly $1.8 million. Altogether, Biglari now owns $258.7 million worth of Cracker Barrel shares. In the six days since Biglari initiated his most recent round of bullish activity, the company’s stock has risen 4.8%.
Interestingly, one day after Biglari’s last transaction, Cracker Barrel reported impressive fourth quarter financials, coming in with an EPS of $1.47, beating analysts’ consensus by a whopping 17 cents. This earnings surprise was on the back of solid revenue growth, which was up 14.2% from the same period last year. In the release, Cracker Barrel execs also increased next quarter’s guidance of $1.00-1.05 EPS, and full-year guidance of $4.50-4.70 EPS.
If these estimates hold by the end of the company’s 2013 fiscal year, it would mark a mere 1.1% growth rate from this year’s total. It’s worth mentioning, though, that Cracker Barrel’s earnings outlook improves more significantly in 2014, with early estimates expecting a 16.3% growth to $5.42 a share by the end of this time period. Over a longer time frame, analysts are predicting that the company will average EPS growth of 10.3% a year over the next half-decade. This five year expected EPS growth rate is middle-of-the-road in comparison to Cracker Barrel’s competitors including: Darden Restaurants (11.9%), Jack in the Box (13.0%), Cheesecake Factory (14.1%), Bob Evans (8.0%), and Denny’s (19.0%).
From a valuation standpoint, it appears that investors are fairly valuing Cracker Barrel’s growth prospects, as the stock trades at a PEG ratio of 1.48; typically any figure between 1 and 2 indicates a stock is neither cheap nor expensive. Cracker Barrel is more expensive than Darden Restaurants (1.30), Jack in the Box (1.46), Cheesecake Factory (1.42) and Denny’s (0.24), but cheaper than Bob Evans (2.09).
In comparison to its own historical averages, the stock looks to be overbought at current levels, as it sports P/E (15.3X), P/S (0.6X), and P/CF (10.3X) ratios above 5-year averages of 12.0X, 0.4X, and 6.3X respectively. Essentially, this means that on average, Cracker Barrel trades at a 37.0% premium over its own historical valuation metrics; this is larger than the likes of Darden Restaurants (+27.8%), Jack in the Box (+16.8%), Cheesecake Factory (+14.7%), Bob Evans (+24.7%), and Denny’s (+12.2%).
Cracker Barrel does offer a dividend yield of 2.98%, and a payout ratio of 36.0% indicates these payments are sustainable. In comparison, Darden Restaurants (3.53%) does offer a more fruitful dividend, but its payout ratio is more than 10 percentage points higher. Jack in the Box and Denny’s do not currently pay a dividend, while Cheesecake Factory (1.34%) and Bob Evans (2.74%) offer lower yields than that of Cracker Barrel.
Hedge fund interest in this stock is limited, though most of the managers with bullish positions are heavyweights in the industry – D.E. Shaw, Cliff Asness, Ken Griffin, Steven Cohen, and Jim Simons are the most notable. The latter two fund managers elected not to change their positions in Cracker Barrel at the end of the second quarter, though Cliff Asness increased his holdings by 52%. Of this “fab five,” Simons’s Renaissance Technologies holds the largest position, worth an estimated $2.2 million.
While Cracker Barrel has impressed the investing world with its recent Q4 earnings beat and double-digit expected EPS growth, most valuation indicators show that the bulls must be at least a little bit cautious. With an improved FY2013 guidance under its belt and a solid dividend yield, this stock can give investors good exposure to the restaurant industry, however. As we briefly mentioned above, it appears the some of the world’s top hedge fund managers agree. Sardar Biglari’s sentiment towards the stock is an additional bullish signal. Ardent investors would be wise to continually monitor this situation by checking back here for updates.