Pickings are slim for value investors these days. With stock indices at all-time highs and housing prices up an average 11% last year, there are very few cheap investments remaining. While scavenging for a bargain, I nevertheless found at least one sector worth adding to my portfolio: furniture. If you have sold most of the stocks in your portfolio for today's nosebleed prices (like me) and forgot to buy a house at the bottom of the real estate crisis in 2009 (like me), then a furniture stock might be worth your consideration as a laggard to real estate resurgence.
The reason I want to own furniture stocks right now is because it is one of the last sectors with any bargains remaining, and furniture stocks will rally this year if history repeats itself. Furniture sales historically lag real estate values by approximately one year. When real estate values fell 16.3% in 2008, furniture orders fell 13% the following year. When real estate prices stopped declining and rallied 11% in 2013, Ikea's revenue also turned from negative to positive 3%. One explanation for this correlation is that homeowners are reluctant to spend money on furniture until the value of their homes rise enough to counterbalance their purchases. A second explanation is it takes several months for credit-dependent homeowners to complete the reappraisal process for securing home equity lines of credit in order to buy furniture. Overall, the positive correlation of furniture sales to real estate values is both intuitive and statistically verifiable.
I love the furniture sector as a laggard play on today's resurgence in real estate, but which stocks are my favorites? Well, big box retailers like Costco and Sam's Club have tried unsuccessfully to capture market share in the furniture sector, and department stores are all but liquidating their last pieces of floorspace-hogging furniture. I am only interested in pure furniture companies for direct exposure to the sector. The largest 50 retail companies in the furniture sector generate 40% of the sector's income, and the top ten are Ashley Furniture, Ikea, Rooms To Go and Berkshire Hathaway (Nebraska Furniture Mart), Williams-Sonoma (Pottery Barn, West Elm), American Signature, Raymour & Flanigan, Pier 1 Imports, La-Z-Boy and Sleepy's.
Of these, the only publicly traded company wholly focused on furniture is La-Z-Boy (NYSE:LZB), a household name since the 1930s. Despite a 45% rally during the past 12 months, its P/E ratio is a relatively affordable 23 versus the sector's average 37. Framed even more attractively, most analysts estimate that La-Z-Boy will earn $1.48 per share next year, giving it a forward P/E of just 17. The company's balance sheet is strong with $131 million of cash and only $7 million of long-term debt.
In recent days, La-Z-Boy has retraced some of its rally due to an earnings disappointment primarily attributable to harsh winter weather. If you are looking at La-Z-Boy anytime soon, note that investors who own stock on February 28 will receive a freshly announced $0.06 dividend, payable March 10.
Another furniture stock that I bought for my portfolio is Nova LifeStyle (NASDAQ:NVFY), an urban furniture company headquartered in California, manufacturing in China and selling globally: 54% in North America, 26% in China, and 19% in Europe as of 2013. It operates its own showrooms and also sells through independent retailers like Ikea, Hermes, Rooms To Go and Berkshire Hathaway's Nebraska Furniture Mart.
Nova LifeStyle's revenue growth has been strong, increasing 170% from 2010 to 2013, with gross profit margins consistently topping 20%. Despite this impressive growth, the market currently values Nova LifeStyle at a P/E of 23 versus the sector's average 37. Likewise, the average price-to-book ratio across the home furnishing fixtures sector is 16, yet Nova LifeStyle's ratio is a cheaper 3. The sector's average return on equity is 11, yet Nova LifeStyle's figure is a stronger 17 due to its vertical integration as a combined manufacturer, distributor and retailer in most locations. Finally, the sector's average net profit margin is 4%, yet Nova LifeStyle's margin is a healthier 7% due to cheap labor and building materials in China. With a recent NASDAQ uplisting on January 17, 2014, I think Nova LifeStyle is still being introduced to institutional investors and could perform well as awareness of this new NASDAQ stock spreads.