Insiders kept their wallets under tight control last week, buying a total of just $320.6 million. Looking through the roster of executive buys, Jon Howie’s nearly $100,000 investment caught our eye (1). The Tex-Mex restaurant Chief Financial Officer of Chuy’s Holdings, Inc. (CHUY) made three transactions in the last seven years: two sales and the recent buy.
Based on his transaction timing and history, investors interested in adding money to the restaurant might be wise to pay attention. Howie sold in November 2013 at $37.51 and again in May 2018 at $29.74. About a year after the 2013 sale, CHUY shares traded nearly $20 lower. Following the 2018 sale, the stock tanked again, slipping to $17.50.
It’s hard to overlook a record of success like that.
Fast forward to last week, Howie changed up his view on Chuy’s Holdings in terms of his investing style, flipping to a buyer from a seller. A change of heart along with an accurate track record are two of our favorite insider buying criteria, so it’s a twofer.
On June 16 2020, the regional dine-in food chain’s main accountant opened the checkbook and purchased 6,225 shares of CHUY at $16 for $99,598 outlay. That’s after the stock temporarily crashed below $8 following disappointing earnings. Shares closed at $14.76 on June 24, 2020.
It seems the CFO sees things a little differently than Wall Street. Analysts have a one-year consensus price target of $18.63 (2) on the Austin, Texas based restaurant. We could be wrong, but it’s hard to imagine Howie stepped into the CHUY shares for $2.63 of upside. Perhaps he has his eye closer to the 52-week high of $29.45.
The street sees the company losing a dime this year and turning an $0.85 per share profit in 2021. Consensus sales estimates for 2020 and 2021 stand at $325.35 and $404.46 million, respectively. (3)
Using next year’s numbers and recent metrics for price to earnings (P/E) and price to sales (P/S), we can generate possible price targets of our own.
For the last half decade, Chuy’s Holdings, Inc. traded at an average P/E of 23.79. If management can hit Wall Street’s 2021 bottom line projection of $0.85 and trade at the five-year average P/E, then the stock would trade at $20.22. That’s a touch more than 25% higher than the CFO’s purchase point.
Moving up the income statement to the top line, investors paid an average of 1.28 times sales for CHY since 2015. Using 2021’s consensus sales estimate of $404.46 million and the typical five-year S/S number, we arrive at a potential price of $26.29. That would turn Howie’s $100k into $163,655.25.
Shorter-term, investors might be able to secure a better price than today’s $14.76. Shares are on the downswing and could find their way to support between $13 and $14.
Reward to Risk Potential:
Based on 2021 sales estimates and the current industry P/S ratio of 0.5, CHUY shares would go for around $10, or $4.76 lower than its current price, whereas upside ranges to $5.46 and $11.53 at its five-year average for P/E and P/S detailed above.
We seek a minimum reward to risk ratio of 2 to 1. Shares would need to fall to roughly $13.50 to meet that threshold on the low-end potential price target of $20.22.
Overall: CFO Jon Howie’s record of great timing and performance cannot be overlooked. Bullish investors might point to the five-year average P/S and 2021 revenue estimates as the reward part of their reward to risk potential and follow the exec’s lead. More risk adverse types might wait to see if current selling brings shares closer to $13.50 and inline with our 2 to 1 reward to risk criteria.