Once upon a time, in a galaxy not actually so far away, the Fool published a little newsletter called The Motley Fool Select. And in that newsletter, it selected a little catalog retailer/budding Internet retailer as one of its premiere recommendations.

The Motley Fool Select eventually became the Fool's small-cap investing newsletter Motley Fool Hidden Gems. And as for the recommendation, I'd say Sportsman's Guide (NASDAQ:SGDE) is nearly as undervalued today as it was when first "discovered." In fact, one of the three analysts following the company expects its share price to increase by more than 50% over the next 12 months alone.

Sportsman's Guide just turned in its second quarter 2004 results, and while Wall Street reacted with the kind of scorn it normally reserves for the lackluster showings of Nokia (NYSE:NOK) or Wal-Mart (NYSE:WMT), this Fool, at least, found the numbers quite impressive.

Granted, sales went absolutely nowhere. Compared with the Q2 2003 quarter, the company sold just $900,000 more stuff this year than last. But look at how it made those sales: fully 43% were done over the Internet, up from 36.5% a year ago. That translates into a massive reduction in the need to print and ship catalogs to potential buyers, and helped this company, despite having essentially no sales growth, increase its per-share diluted earnings by 25%.

Valuation-wise, the free cash flow spigots are wide open. Despite buying itself a golf company last month, it still made enough extra cash to top off its coffers with an extra $5 million over the course of the last year. Sportsman's Guide has an ultra-low enterprise value-to-free cash flow ratio of just 8.2, combined with a super-efficient return on equity of 27% (better than eBay's (NASDAQ:EBAY)), a historical earnings growth rate of 35% (better than Dell's (NASDAQ:DELL)), and a projected growth rate of 15% (half again better than IBM's (NYSE:IBM)). That all looks super to me, and I would likely be a buyer if not for one thing.

Over the past six months, it appears that insiders have sold off nearly 90% of their holdings in the company, leaving Sportsman's Guide's insider ownership level at just a fraction of 1% -- worse than at perennial cash-burner Xybernaut (NASDAQ:XYBR). Now, insider selling should not always be viewed as a red flag -- but insider selling of essentially everything? That worries me. And so, rather than buying, I personally am going to think long and hard on why these insiders are selling.

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Fool contributor Rich Smith owns no companies mentioned in this article.