Scoring with Dick’s Sporting Goods

October 10, 2013, 11:39 AM UTC

As co-manager of the $1.2 billion Hennessy Focus Fund since 2009, Ira Rothberg, 33, seeks a few undervalued companies he thinks can deliver long-term growth — and then holds them for six to seven years. Rothberg was an analyst for his predecessor, Chuck Akre, back when the fund was called FBR Focus, and like Akre, he has produced stellar results: average annualized returns of 19.5% over the past three years, easily beating its peers. One stock that made the cut: Dick’s Sporting Goods.

1. It’s got growing profit margins

Dick’s sales have been a bit sluggish of late, with the retailer’s Golf Galaxy stores hit hardest by a weather-related slowdown. As a long-term investor, Rothberg says he “couldn’t care less” about such blips. Between 2001 and 2012, Dick’s added almost 400 new stores and quintupled revenues to $5.8 billion; it’s now the nation’s leading full-line sporting goods retailer. That means buying power. As a result, gross margins expanded from 24.5% in 2001 to 31.5% in 2012, and Rothberg expects continued improvement.

2. You can buy it only at Dick’s

Excellent relationships with top vendors like Nike, Under Armour, and the North Face give Dick’s exclusive access to top merchandise, which the company sells in premium shops built into its big-box locations. The stores-within-stores generate higher sales and profits per square foot than the rest of the space. Rothberg says Dick’s recently disclosed that exclusive products accounted for 23% of sales for 2012 and that the company will increase this figure, with a goal of 35% by 2017. Says Rothberg: “There is a lot of runway left.”

3. It will bolster its market share

Dick’s is still rapidly beefing up. It licensed the Field & Stream brand and opened its first store by that name — it sells accessories for fishing and hunting — in September. The company plans to open 54 additional Field & Stream locations by 2017 while adding about 270 Dick’s locations to its existing 532. Analysts warn that the company faces fierce competition in the fragmented sporting goods industry. But with 9% market share, it has plenty of room for growth, in Rothberg’s view.

4. Dick’s can fend off

The company’s stock has jumped 47% since Rothberg first bought shares in January 2012, but he believes Dick’s can lift its earnings per share at an annual rate in the high teens over the next five years and that the stock should rise at a similar clip. One risk for any retailer: Rothberg thinks the threat is less dire in sporting goods, where many customers want to try equipment for themselves. With both a website and stores, Dick’s also allows web customers to get deliveries at retail locations or return orders there.

Correction: An earlier version of this article incorrectly stated that Dick’s does not sell guns.

This story is from the October 28, 2013 issue of Fortune.