A continued recovery in the U.S. housing market, apart from well timed support from government policies, fuelled a rally in stocks of the companies which largely rely on buyers' discretionary spending. This included home furnishing stocks such as American Woodmark Corporation (NASDAQ: AMWD) and Hooker Furniture Corporation (NASDAQ: HOFT) in which investors made serious money last year. Conventional wisdom tells us that market rallies come to an end when valuations are stretched beyond limits. However, it may still be some time before this can be said about these stocks. Here is why these stocks will continue to reward investors.
American Woodmark Corporation gained 42 percent in 2013 leading to a price earnings ratio of 31.6. While some investors would classify this as unreasonable valuation, a forward multiple of 17.5 indicates the company's earnings are going to go through the roof. American Woodmark makes kitchen cabinets for the remodeling and new home construction markets. As such, it did well in 2013 with six month earnings up nearly 5 times to $11.9 million while sales grew nearly 20 percent. The best part of this growth is the absence of any special or one time income except for a marked decline in restructuring expenses. Although revenue growth was ahead of market expectations, investors were hoping for even stronger earnings growth. While this is a negative, it indicates there is ample room available for further earnings growth. Another positive for the stock is a share buyback program under which the company can deploy up to $93.3 million.
With nearly 18 percent growth in 2013 in share price, Hooker Furniture Corporation did not really outperform wider markets. While the stock may not have been top wealth generator for investors last year, it has a lot of positives working in its favor. Foremost, the stock trades at a forward price earnings multiple of just 14.3, indicating there is lot of steam left. The company pays regular dividend and has annual yield of 2.4 percent. It has a net margin of 5.1 percent which has upside potential given a debt free balance sheet. The stock trades at a 34 percent premium to its book value. While valuations are clearly attractive, the stock will likely keep moving up in a narrow range and is not expected to break out. Apart from the company specific factors, steadily increasing consumer spending in the United States is another positive which will likely translate into higher top line and bottom line for Hooker Furniture in quarters to come.