Tile Shop Cracks, and I'm Buying

My Special Situations portfolio has been a frequent buyer of Tile Shop (NASDAQ: TTS  )  as the stock has fallen, and I'm back today to buy more. Poor results from peer companies have analysts falling all over themselves to downgrade house-related stocks like Tile Shop. So I think today makes an excellent opportunity to add to my stake in this fast-growing retailer.

A quick look at the numbers
Tile Shop is a fast-growing retailer, and the market tends to price these beasts at a high earnings multiple. So when actual results underperform investors' expectations, these belles of the ball can get severely punished. And that's what we've seen at Tile Shop recently. So here's what one analyst expects.

Credit Suisse lowered its 2014 earnings forecast from $0.40 a share to $0.37 -- lowered expectations of 7.5%. Investors frothed at the mouth, and shares plummeted. The analyst also lowered 2015 targets a similar amount, from $0.54 to $0.51. So wait a second. The analyst is still expecting 37% annual earnings growth from 2014 to 2015. And in an ironic twist (and numbers game), earnings growth is actually expected to be higher now than before the downward earnings revision. (Run the numbers yourself.)

But you can hardly blame the analyst for investors' knee-jerk reaction.

Let's recall that Tile Shop is quickly growing out its store count, and this is not just a one-year exercise, but rather a process over the next decade. And insiders have purchased earlier this year at prices substantially higher than today's. I'll be looking for more insider purchases at these reduced prices.

Foolish bottom line
So tomorrow my Special Situations portfolio will buy $500 in Tile Shop stock. I expect it to outperform over the coming years, and reduced expectations are a great way to take advantage of Mr.Market's fickle moods. For more great stocks, follow me on Twitter: @TMFRoyal. And check out my dedicated discussion board.

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