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Home-Decor Winner: Under the Radar

BOSTON ( TheStreet) -- Home-decor retailer Kirkland's (KIRK - Get Report) stock has risen seven-fold in one year, recording a 52-week high on Friday.

But heavy selling from insiders and institutional holders could signal a looming peak. Still, the shares are attractive. TheStreet's stock model just upgraded Kirkland's to "buy."

In the fourth quarter, co-founder and director Carl T. Kirkland sold 16,100 shares, cutting his stake to 12%. Chief Executive Officer Robert Alderson sold 64,900 shares, cutting his holdings to 3.7%. Investor Renaissance Technologies, the hedge-fund started by math whiz James Simons that uses computer-driven strategies, dropped its position to 4.6%.

The selling pressure hasn't reduced momentum. The stock has advanced 22% in the past four weeks, as the benchmark Nasdaq rose 8.2%. The shares gained 7.8% during the past five trading sessions, signaling a flurry of buying. Perhaps the recent selling by stakeholders was responsible share sales.

Kirkland's has emerged as an undisputed winner after the recession. It used the economic downturn to edge out competitors, stockpile cash and refocus its brand. Home Depot (HD - Get Report) folded its interior design chain Expo Design Center in 2009. Linens 'n Things went bankrupt in 2008 and began liquidating its stores. It recently relaunched under new ownership as an exclusively online retailer.

Kirkland's fourth-quarter earnings grew 47% to $22 million, or $1.08 a share. Revenue climbed 6.9% to $143 million as comparable-store sales, a key gauge, improved 10%. The operating margin almost doubled, from 12% to 21%.

For the full year, earnings per share rose to $1.71 from 47 cents in 2008 and a loss of $1.32 in 2007. Management has fine-tuned its locations, opening up three new stores in the latest period while closing 20. As a result, return on equity, a key measure of profitability, expanded from 18% to 39%.

Income-tax benefits bolstered results in 2008 and 2009, but those gains are non-recurring, so future results could suffer by comparison. The total store count is 279, 7% fewer than last year. Kirkland's plans to open 30 to 40 and close 15 to 20 stores in 2010.

The company will fund the expansion with cash from operating activities, maintaining its outstanding liquidity. Its balance sheet contains $76 million of cash, equating to a current ratio of 2.6, and no debt. TheStreet's stock model awards Kirkland's a financial-strength score of 7 out of 10, on par with the "buy"-list average.

With a market value of $396 million, only three sell-side analysts cover Kirkland's. Two advise purchasing its shares and one recommends holding them. Piper Jaffray projects the stock will gain 28% to $26. SunTrust Robinson Humphrey is also bullish. TheStreet's model expects it to hit $26.39.

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