A China-Focused Furniture Maker That's Sitting Pretty

| About: Nova Lifestyle, (NVFY)

The latest indicator of factory activity in China came in worse than expected and triggered a panicky selloff last month in the global equity markets-which in turn has created buying opportunities for investors with calmer dispositions.

Case in point: Nova LifeStyle (NASDAQ:NVFY), a small-cap manufacturer of furniture based in Commerce, California. Nova's retail network expands the globe, but the company has placed a particularly large bet on China that should pay off over the long haul.

To be sure, China's Markit/HSBC Purchasing Managers' Index (PMI) dropped to 49.6 in January from December's reading of 50.5, falling below the 50 line that separates expansion and contraction. It was the first contraction in six months, reflecting a weaker-than-anticipated beginning of the year for China and the rest of the world, as the US Federal Reserve and central banks throughout Europe tighten the monetary spigot.

China's PMI numbers were released on January 23; global equity markets tumbled the following day. But investors are losing sight of secular trends in the country that will outlast ephemeral dips in the markets.

Notably, the world's second-largest economy has embarked on long-term infrastructure projects that will continue to stimulate activity. Moreover, the country's leaders are intent on shifting the economy away from dependence on exports and toward greater consumer spending.

As the Middle Kingdom's middle class earns more disposable income, they're increasingly keen to emulate the lifestyle that they see in the West. The race for social status is very much alive in China-and that means filling homes with well-designed furniture.

Meanwhile, in the US and Europe, recent hiring in construction and the continued buoyancy of the housing market will benefit consumer discretionary stocks such as Nova. Now that US housing prices have turned the corner, homeowners are viewing their domiciles as long-term investments again instead of just cash drains. As they gain confidence from the "wealth effect" of rising home prices, they're spending more money on remodeling and furnishings.

That's where Nova comes in. The company is a designer and manufacturer of modern furniture and myriad accessories. Nova's products are manufactured in the US, Europe and Asia and marketed under such brands as Diamond Sofa, Colorful World, Giorgio Mobili, and Bright Swallow International.

Nova's major product categories include sofas, dining tables and chairs, which account for approximately 22 percent, 17 percent and 15 percent of sales, respectively.

I first recommended the Nova in a Nov. 6 article. On January 17, Nova launched its first day of trading on the NASDAQ Global Market; the company had been publicly traded on the OTC Bulletin Board since summer of 2011 under the ticker symbol STVS.

Since getting listed on NASDAQ, Nova's stock has been on a tear. With a market cap of $119.2 million and a trailing 12-month price-to-earnings (P/E) ratio of only 22.4, this company has plenty of upside left. It's also trading at a bargain, compared to the trailing P/E of 36.2 for its industry of home furnishings and fixtures.

From January 26-30, the company participated in the Furniture Market Show at the World Market Centre in Las Vegas.

Despite modest sell-offs so far this year, the stock market as a whole is overbought and vulnerable to a pullback. However, as mentioned above, economic growth remains on track and a market crash is not on the horizon.

Shares of high-quality companies that still trade at reasonable prices are increasingly hard to come by, which make's Nova's low valuation so compelling right now. Meanwhile, investors should be cheered by recent economic tailwinds that will gather strength in 2014.

Admittedly, emerging markets such as Turkey and Argentina are worrisome, as the Federal Reserve's tapering of quantitative easing sends dollars out of those markets and back home. However, many global central banks have recently hiked interest rates to counter those flows, showing that policymakers learned a few lessons from the emerging market meltdown of the mid-1990s.

The upshot: Global recovery-and freer spending consumers-will remain the trend in 2014.

Upbeat Performance

Nova recently announced a generally upbeat operating performance that bodes well for the company's future.

Nova's revenue for the first nine months of 2013 was $56.5 million, a 21.8 percent increase from $46.3 million during the same period in 2012. Operating income for the nine months remained stable at about $4.7 million, while comprehensive income was $3.9 million, an increase from $3.57 million in the same year-ago period. Operating income for the third quarter also held steady, at roughly $1.71 million, while comprehensive income was $1.29 million, an increase from $1.21 million in the same year-ago quarter.

Third-quarter earnings per share (EPS) decreased slightly to $0.19, compared to EPS of $0.20 in the same year-ago quarter. However, shares outstanding increased year over year, which contributed to the slight EPS decrease.

Nova sells its products through a global network of franchises, retail stores and distributors. The company is the result of a 2011 merger between Nova Furniture and Diamond Sofa. Diamond distributes furniture from Nova to retailers including Nebraska Furniture Mart, part of Warren Buffett's Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B).

Founded in 1937, Nebraska Furniture Mart is the largest home furnishing store in North America. Berkshire Hathaway purchased a majority interest in Nebraska Furniture Mart in 1983.

In 2011, Nebraska Furniture Mart announced that it was significantly expanding its retail operations in high-growth areas of the US-especially North Texas, where it is building a $1 billion retail space that will substantially boost Nova's sales. The opening date for the Texas expansion is slated for spring 2015.

Nova is poised to benefit from economic recovery in the US, China and even Europe, which has emerged (albeit tentatively) from severe recession.

China's growth may be subject to ups and downs this year, but over the long haul, the country's consumers will continue to keep their wallets open, to slake their appetite for the material manifestations of "the good life."

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.