November saw the largest year-over-year gain since August 2006, racking up 5.5%. The month-over-month numbers were down slightly, but the consensus among economists was that this was merely normal seasonality. Ironically enough, what most would consider a good thing - a shrinking supply of existing homes available for sale - may be a significant factor limiting growth in the market for now. Another limiting factor is a hangover from the housing crisis: many homeowners have only a tiny percentage of equity at their homes' current values, so selling would be financially impractical.
Still, with investors gobbling up available homes with cash purchases, first-time buyers are facing an unfriendly marketplace. Few starter homes under $100,000 are available anywhere in the country, and the situation is worst in the western U.S. There are early signs that builders may be willing to ease back into the market, though banks are still leery of financing large developments.
Improvement in housing demand will ripple through the economy, and one of the first and most direct beneficiaries will be the Consumer Cyclical sector, which includes such industries as Furniture & Fixtures, Audio & Video Equipment, and Appliances & Tools. So what are the small-cap gems whose day in the sun may be just over the horizon?
First is a household name (no pun intended): Ethan Allen Interiors, Inc. (NYSE: ETH). From its 2008 highs Ethan Allen's share price had fallen by two-thirds by early 2009, but it has recently neared those highs once again, hitting just at the $30 mark as 2012 closed. It is no analyst's darling, downgraded to two stars (out of five) by S&P on October 24, 2012 and rated "Neutral" by Thomson Reuters, but Second Opinion did upgrade it (albeit only to Neutral from Avoid) on January 22. Yet the company has the highest EPS growth in its industry at 122.5% and has a respectable price performance at 10.81%, better than peers Leggett & Platt (8.49%) and Pier 1 Imports (9.60%) and close to La-Z-Boy (which we'll consider next) at 11.45%. P/E is below its peers at 15.2 vs. 19.1.
At the moment Ethan Allen is a bit pricey given its history - it is currently 58.06% off its 52-week low but only 6.07% off its 52-week high - and it is also facing technical resistance around the $30 mark. However, should the stock correct over the next several weeks, this would be a good buying opportunity to set up for a strengthening housing market into the spring and summer.
La-Z-Boy (NYSE:LZB) is in similar condition. Rather than falling as the housing bubble burst and the economy sank into recession and then rebounding, La-Z-Boy dipped below $2 in 2009 but has steadily climbed since. It is now 44.57% off its 52-week low and only 7.59% off its 52-week high. Like Ethan Allen it has been panned by the analysts, though Thomson Reuters does give it a minimal Neutral rating (4 of 10) resulting from an upgrade on January 4.
It has enjoyed strong price performance for its industry and has a gross margin over the trailing twelve months of 31.01% versus 26.62% for its peers. As a result its P/E of 18.5 is slightly above the industry average of 17.7. Given its current pricing, La-Z-Boy like Ethan Allen will be best bought on a correction. The main difference between the two is that La-Z-Boy has slightly stronger fundamentals. Also, Ethan Allen appeals to a slightly more affluent market segment, so if housing growth is strongest in starter homes, it may not benefit as much as La-Z-Boy.
Finally, P&F Industries (NASDAQ:PFIN) is another potential beneficiary of improved housing sales. It sells tools and hardware, meaning it should see a bump before the furniture manufacturers as construction heats up. This is particularly true since the housing bust thoroughly shook out the construction industry. Workers have left, companies have failed, and those that survived have not spent on new equipment, so there should be a fair amount of pent-up demand.
At a current market cap of $32.1 million P&F is much smaller than Ethan Allen and La-Z-Boy (both north of $800 million). Its price performance is an impressive 44.14%, far ahead of its peers: Snap-on (NYSE:SNA) at 2.41%, A. O. Smith (NYSE:AOS) at 11.34%, and Planar Systems (NASDAQ:PLNR) at 13.29%. This stock is more of a gamble, since it is at a five-year high (last close 8.75) that is 127.75% off its 52-week low, yet waiting for a significant correction could miss the earlier benefit of ramped-up construction.
We can only hope that new life in the housing market will strengthen an anemic overall recovery. In the meantime, these are some of the companies likely to enjoy the first benefits of spring at long last for housing.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.