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There's a debate raging around housing stocks over whether we've turned the corner. My recent arcticle highlight improving end-of-year housing data, significant short interest and rapid share price appreciation over the past few months prompted 20 comments on both sides of the argument.

Personally, I think we've seen the low in the housing-related stocks. I don't expect shares of companies, including Lumber Liquidators (LL), the debt-free flooring discounter, to get back to last year's lows. Instead, I think we'll continue to inch our way back to a healthier housing market.

If I'm correct, stocks like Lumber Liquidators offer investors significant upside. The company continues to build new stores and enter new markets. And, as cost conscious housing investors seek to add value to their newly acquired investment properties, discount flooring makes a compelling case.

Big box stores like Home Depot (HD) and Lowes (LOW) are already too large to have new store opening move the revenue needle substantially. But Lumber Liquidators, with plans to increase store count by 15% annually, and 33 new stores built in the first nine months of 2011, will see significant sales growth. Since 2007, expansion has fueled 15.2% compounded annual sales growth as the chain has grown from 116 to 260 stores.

Profits offer upside too. Buying power will improve alongside store count, offering scale and bottom line leverage. And, stores built during the lackluster real estate market will provide the company with faster ROI thanks to lower construction and real estate costs. The company is already enjoying the benefits from such growth, as compounded annual earnings have grown 24.9% since 2007, well ahead of sales.

Recent housing data offers support to improving flooring demand. In December, building permits increased 7.8% from last year while housing starts climbed 24.9%. Single-family housing starts rose 4.4% from November. And, while new home sales in December came in at the lowest in 2011, the month's supply fell to 6.1 from 6.9 the prior year - suggesting capacity is thinning. Additionally, the median number of months new homes sat for sale hit a 2011 year low of 6.7 in December. For all of last year, existing home sales inched 1.7% higher, with December sales gaining 3.6% from December 2010.

Despite the credit crunch and housing freefall, Lumber Liquidators has seen its earnings per share go from $0.42 in 2007 to an estimated $1.21 this year. Independent flooring shops continue to own the lion's share of the fragmented market, suggesting Lumber Liquidators has plenty of room to capture share as it grows.

In Q3, the most recently reported quarter, sales rose 16.8% to $172 million. Comparable store sales increased 3% and gross margin came in at 35.6%, up from 35.2% the prior year. Thanks to scale, SG&A fell to 29.3% from 30.5%. Sales and earnings continue to head in the right direction, which helped shares climb from a low of $13 last summer to over $20.

Sellers remain unconvinced, with 13 days of volume still held short. Any continued improvement in the company's comp sales or in national housing data, is likely to send shares considerably higher. Additionally, any election year steps to move housing inventory add upside, as new home owners and investors update distressed properties for resale or rental.

Source: Housing Pickup Offers Upside For Lumber Liquidators