If you remember the kids TV show, Electric Company if memory serves, maybe it was Sesame Street, anyway, whichever used to have a regular skit about one of these things is not like the others. They’d show three apples and an elephant. Captain Obvious… kids excited about knowing the answer point at the TV, probably an iPhone or iPad now, and scream – elephant!
Sometimes, corporate executives play their version of ‘one of these things is not like the others’. We tag them as change of heart buys. A change of heart buy is when an insider who sells, sells and sells some more opens up the bank account and buys. Now, if you’ve read three or four of our Insider Buys with a Purpose stories, then you know we are big fans of change of heart purchases.
There are change of heart buys and then there are… well, we aren’t quite sure how to identify this insider purchase as it unlike most we have ever seen.
National Vision Holdings, Inc. (EYE) director Randolph Peeler bought more than $1 million of the eyeglasses retailer most people know as Vision Center on August 10, 2020 (just reported last week.) What makes Peeler’s buy so unusual? Two things:
First, he’s done nothing but sell, and when we say sell, we don’t mean number of transactions, rather their size. He’s sold shares six times since 2018, pocketing, wait for it… $354.3 million. (1) So, you can see how a $1 million buy is like an elephant next to a bunch of apples. Or maybe, it’s an apple compared to a bunch of elephants; although, you could miss the apple between elephants, but you’ll never miss the elephant with apples.
Normally, change of heart buys come when a company’s stocks price has fallen on hard times. The company fell short of earnings forecasts, bad company specific news (see Boeing MAX 737) or the overall market got smashed like it did in March because of COVID 19.
When shares are trading at/near lows, it’s easy to think the insider is value hunting. Oh, but that’s not the case here. Peeler bought at $35.23, way above the corona low of $11.70 and not too far off from the 52-week high of $40.00.
Now we have two elephants.
Call us crazy, but experience says buying $1 million of EYE, damn near the top, when you could have bought more than $20 cheaper five-months earlier and against the backdrop of $354.3 million sold in the last two-and-a-half years, leads us to believe something unusual is about to happen.
If Peeler sought value based on earnings growth, then sometime after the COVID low makes more sense. Obviously, it’s pure speculation, but some corporate development had to take place in late July/ early August that triggered this massive swing in Peeler’s sentiment towards National Vision Holdings.
From an industry perspective, price to sales (P/S) is the only metric we see that might be the director’s motivation. As we type, EYE is valued at a little more than two times sales (2); whereas, the peer group’s P/S ratio is closer to four.
However, the specialty retailer’s average P/S ratio during the last five-years is 1.63 and maxed out at 2.36. So, there isn’t any hidden value here; at least not right now. Even when looking at next year’s consensus sales forecast of $1.92 billion (3), shares would price out at $38.99 with the typical P/S ratio and at $47.74 with its current valuation. EYE shares would pop to $56.34 if investors were willing to pay up to the five-year high price to sales number of 2.36.
The $1 million buy makes less sense when using the average price to earnings (P/E) ratio of 20.48 during the last half-decade. The current 2021 consensus is a bottom line of $0.78. Peeler would take a major haircut at the average P/E ratio since 2015 and next year’s forecast, EYE would fall to $15.97. Heck, even at the highest earnings per share estimate of $1.04 only creates a price target of $21.30.
Now, if National Vision Holdings can maintain its current P/E of 101, then Peeler’s buy makes a lot of sense and would make him a ton of money. You know it’s coming, but… that industry average P/E is 33.5, which would put EYE just about where it is now, a year from now.
Overview: It’s hard to make the fundamental case for National Vision Holdings, Inc. (EYE) based on its 2021 sales and earnings expectations and recent valuations history. Considering Director Randolph Peeler’s insider transaction history, and his purchase price relative to its 52-week range, his $1 million buy leads us to believe there is the potential for some big news in the next six-months to a year. Buyout offer? Just speculating.