Finding Underperforming Growth Stocks

by: Value Line


We set out to find equities that have underperformed the broader market averages by a wide margin over the past three months, yet still command relatively high valuations.

Dixie Group manufactures and sells carpets and rugs to high-end residential and commercial customers.

In contrast to Dixie Group’s industry, Avigilon participates in a very modern space.

By Sigourney B. Romaine, CFA

In this stock screen, we set out to find equities that have underperformed the broader market averages by a wide margin over the past three months, yet still command relatively high valuations and have shown solid revenue growth of late. In order to identify stocks that once had sky-high valuations but have since come back down to earth to a degree, we screened The Value Line Investment Survey for equities that have had total returns of less than -10% over the past three months, which compares to an 8% gain recorded by the S&P 500 Index over that same time frame.

Next, we made sure that sales had increased by more than 20% in the last fiscal year, and that the forward price-to-earnings multiple was above 25. The resulting list of seven stocks can be seen below. Of these, we have chosen to highlight Dixie Group, Inc. (NASDAQ:DXYN) and Avigilon Corp. (OTCPK:AIOCF).

Dixie Group, Inc.

Dixie Group manufactures and sells carpets and rugs to high-end residential and commercial customers, and offers some carpet and yarn-related services to other manufacturers. Its business is focused on the premium end of the soft floor covering market, where attractive styling, design, color, and quality, as well as limited distribution are rewarded.

The company has just one line of business, as defined by SEC regulations, carpet and rug manufacturing. Three brands, Fabrica, Masland Residential, and Dixie Home, target residential markets, with products that sell at prices that are around two to five times the average for the residential floor-covering industry. The company uses both natural (mainly wool) and man-made materials, while production techniques range from machine to hand weaving and hand-hooked techniques. The top-end Fabrica line is sold through interior decorators, selected retailers, luxury home builders, and makers of luxury motor coaches and yachts. The more moderately priced Dixie Home brand is offered through retailers and home centers.

Dixie Group's commercial business is conducted through the Masland Contract, Avant Contract, and Atlas divisions. The first makes and sells broadloom and modular carpet tile for the specified commercial market, and is offered both directly to customers and through specialty retailers. Avant Contract is a fairly new venture (launched in 2013) that focuses on the corporate office market through multiline sales agents. These agents carry a broad array of products for corporate interiors, with Avant as their sole floor-covering line. Atlas, just acquired in the first quarter of 2014, makes high-quality commercial carpets and tiles.

Following a solid 2013, when Dixie Group's sales rose 30%, the company reported a loss in the first quarter, excluding an accounting gain on the purchase of Atlas. This contributed to the shares to losing over 40% of their value in the subsequent two months. A large number of factors contributed to the loss, including winter weather, a slow startup of a new dye house, acquisition expenses, and the costs of rebranding and integrating a 2013 purchase.

Without these, operations would have roughly broken even. Dixie has reacted with some cost-cutting efforts and a restructuring program that is estimated to cost $1.3 million in 2014 and $1.1 million next year. Nonetheless, after the bad winter, organic sales were up 13%, and total revenues, including Atlas, advanced 25%. Moreover, recent moves have greatly expanded capacity, suggesting that some of the costs that weighed on March results will, in fact, prove temporary. With luxury home construction and share gains in commercial markets likely to continue, growth-oriented investors might want take a look.

Avigilon Corporation

In contrast to Dixie Group's industry, which was invented by the ancient Egyptians, Avigilon participates in a very modern space. The company designs, manufactures, and markets high-definition (HD) network-based video surveillance systems, video analytics, and access control systems for the global security market. Incorporated in 2004, it sold its first commercial surveillance and access control system in December 2007, and went public in October 2011.

The Avigilon system is designed to provide high-quality video capture, transmission, recording and playback, and video analytics. Avigilon offers its products as a complete system or as components. These include the Avigilon Control Center (ACC) video management software, in Core, Standard, and Enterprise versions; a broad range of HD Internet protocol cameras (presently 104 models); video recording hardware; real-time video analytics; the Avigilon Access Control manager; and accessories such as lenses, joysticks, and keyboards.

Avigilon now manufactures all its products in its Richmond, BC plant, though it may open a new facility fairly soon to accommodate its rapid growth. It sells its products to most of the world through resellers that it calls integrators. Principal customers include government - military/law enforcement/prisons, ports of entry, casinos, utilities, petrochemical plants, stadiums, and public transport and traffic monitoring facilities. One source estimates that the worldwide video surveillance market was around $12.6 billion in 2012, and will rocket to around $23 billion in 2016.

After a banner 2013, when Avigilon's sales soared 78% and earnings more than doubled, 2014 first-quarter results did not disappoint, as sales jumped 74% and net income nearly tripled. Product introductions and the integration of recent acquisitions, combined with a large increase in the sales force, ought to deliver similar results over the balance of 2014. And with new technology and economies of scale likely to make the company's offerings more attractive over the long haul, we expect very rapid earnings growth to persist for years. Indeed, the company's goal is an annual run rate of $500 million in sales by the end of 2016.

Nonetheless, the stock took a beating when it was announced that CFO Bradley Bardua will resign due to health reasons. Mr. Wan Jung, a director of Avigilon and former CFO who retired a few years ago, has been named interim CFO. Investors appear concerned that several other executives have resigned over the past few months, which may signal a problem within the company. We think it's likely that the correction was not fully warranted. With the stock around the middle of its 52-week range, growth investors should consider investing in this major player in a fast-growing industry.

Company Name Ticker Total Return 3-Month Sales Growth 1-Year Current PE Ratio
Dixie Group DXYN -43.22 27.75 29.43
TASER Int'l TASR -28.79 20.19 33.20
Silicon Image SIMG -21.40 22.88 25.90
Avigilon Corp. OTCPK:AIOCF -20.83 53.93 29.84
Boulder Brands BDBD -20.68 20.89 35.58
CoStar Group CSGP -16.09 23.81 49.73

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.