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Drive For Show, Putt For Dough

 May 04, 2012 11:08 AM

(By Kevin Donovan) We recently carded a 97 at our local par-64 municipal track, and it struck us square in the noggin (an idea, that is, not a golf ball).  Why not get revenge for this humiliation by selling golf-related stocks short?  Then we realized that a solid short game is the best revenge on the course and thought to investigate ways to play a round of trading for investment returns.

It's hard to find a golf-only play other than Callaway (ELY), so we included Nike (NKE), Dick's Sporting Goods (DKS), and Golfsmith (GOLF) in our review of companies that haunt our leisure hours. Callaway and Nike make clubs and balls, while Dick's and Golfsmith sell them.

[Related -Lululemon Athletica inc. (LULU): Near-Term Risks Could Further Derail Investor Confidence]

According to the National Golf Foundation, a business research outfit, the number of golfers in the United States grew from 20 million in 1980 to about 30 million in 2000.  That number was a plateau, the Tiger Woods phenomenon of the 2000s notwithstanding.  For the last four years, Golfers have been kicking the habit faster than newcomers have become enslaved to this addictive game, according to .

[Related -Nike Inc. (NYSE:NKE) Q2 Earnings Preview: Just Doing It, Again]

However, Golf Datatech reports the number of rounds played increased 22% in the United States through March compared to a year ago.  In March alone, the number of rounds played increased 29.5% year over year, Golf Datatech calculates. That bit of data is yet another straw in the wind indicating an economic recovery, consumer confidence on the rise, and some discretionary income sloshing toward fun and games – a healthy backdrop for the purveyors of golf equipment.

However, a week ago, Callaway Golf reported that it missed analysts' first quarter estimates, with earnings per share before special items of $0.18 vs. the consensus forecast of $0.22.  It also missed revenue estimates and margins contracted.  That, of course, sent the stock reeling.  The share price of $6.25 is down from $6.98 before the earnings announcement.  Callaway has traded in a range of $4.70-7.29 in the past year.  We think Callaway is dead money until signs emerge that sales are picking up with the improved environment.  We don't think it's too late to sell, but we'll keep our Odyssey two-ball putter made by Calloway.

Golfsmith will release its fiscal first-quarter results before the market opens on May 15.  At $4.75 per share, the stock is down 13% in the last year, but up 27% in the last three months.  Its 52-week trading range is $2.76-5.22. We find this price trend troubling and would not add to positions.

Which brings us to our momentum play, Nike.  (Full disclosure: The author wields a set of Nike Slingshot irons). 

The stock hit a 52-week high Thursday of $114.56 before dropping back to $114.40.  The maker of sports gear and apparel has notched a return of almost 20% so far this year, and if the economy remains friendly, we expect more.  Nike is trading at a multiple of about 24 to trailing 12 months' earnings, compared to about 68 for competitor Under Armour (UA).  What's more, a modest dividend yields 1.30%.

Not to be forgotten, a retailer with the humble name of Dick's Sporting Goods is also near its 52-week high. At $50.71, Dick's has risen more than 30% this year.  It trades at a trailing 12 months' PE of about 24, in line with the industry, a relatively small universe since the big competitors such as The Sports Authority, are privately owned.  With discretionary income growing in an expanding economy, we think Dick's can move higher. As we birdie the 18th and head to the clubhouse, we would buy Nike and Dick's, hold Golfsmith, and sell Calloway.



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