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Time to Nibble on Housing-Related Stocks
By Michael Brush
Exclusively for InvestorIdeas.com
July 24, 2008
Is it finally time to start building positions in housing-related stocks?
That’s what one old timer in the business is telling us.
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I’m talking about Albert Prillaman, the chairman of Stanley Furniture (STLY). He has been with the company for almost four decades, serving for a time as its chief as well.
His recent purchase wasn’t particularly large – only $307,000. But here’s why I think it still matters as a bullish signal.
- First, this is a man who knows when to buy his company’s stock. A string of well-timed buys in 2002-2005 plus one in 1993 have earned him an average 28% six-month return after buying, according to Thomson Financial. That’s not a guarantee the same thing will happen now. But it shows he has good skills at timing his stock.
- Next, he’s been in the furniture business a long time. He’s been with Stanley Furniture since 1969. So he probably has a good sense of when things are bottoming. Though it is important to keep in mind that insiders are often early.
- Third, while that’s a relatively small amount for a purchase, this is a tiny company with a market cap of only $81 million. So it makes the buy more significant.
Now, the company states pretty clearly it doesn’t know when the bottom will be in for its sector. Indeed it just guided down on earnings. But Prillaman may be betting the worst is priced in to the stock, even if it could bounce around in a trading range for a while.
Stanley Furniture stock is down from a decade-long peak of above $30 in 2005. And it is down from $20 a year ago. Prillaman bought recently at around $7.70 a share in the rebound off a panic low of around $7 that took place on the day there was a high-volume sell off in the overall market, July 15.
Stanley Furniture stock recently traded for $8.50. So you may have to be content with prices that aren’t as good as what Prillaman got. On the other hand, insiders don’t usually buy for a short-term trade so that probably shouldn’t matter too much. He’s probably betting on a significant upward, long-term move.
Plus you can try to buy part of your position now, and perhaps pick up the rest at lower prices with limit orders. Though I think the market will be in an uptrend here for the next few months – because negative sentiment hit such extremes on July 15 – there could obviously be some choppiness near term.
The company
Stanley Furniture is about the 16th largest furniture maker in the U.S. It makes residential furniture sold in the upper-medium price range. The company sells through department stores, regional furniture chains and independent furniture stores.
Despite the exodus of manufacturing abroad, Stanley Furniture still makes its product in the good old U.S. It has plants in North Carolina and Virginia -- though it does import some of its furniture. Domestic manufacturing accounts for about two-thirds of its revenue.
The current state of business and rebound potential
Sales in the most recent quarter fell nearly 13% to $59 million. The problems, of course, are obvious. Foreclosures are high, and the housing sector is in the tank. The economy is weak. Plus the cost of materials is rising. All together, that’s brought an “industry-wide weakness in consumer demand for residential furniture not seen since the early '80s," Stanley Furniture President chief Jeffrey Scheffer said recently.
“The perfect storm of historically low levels of housing activity, consumer confidence and personal disposal income has us still searching for a bottom in this current cycle,” says Scheffer. “And frankly, we don’t see much out there that would suggest business turning up any time soon.” Business will come back, he says. “Exactly when, we’re clueless at this point.” He also thinks recovery is going to be slower, compared to prior rebounds.
The consolidation
In response, Stanley Furniture is digging in. The company plans to consolidate its two North Carolina manufacturing operations into one. About 350 jobs will be eliminated over the next two to three months, in the process. It’s also eliminating two executive positions and offering voluntary early retirement incentives to salaried employees.
This consolidation will ultimately bring annual pretax savings of $5 million to $6 million “while still providing us enough capacity to grow our volume back to historical levels and beyond,” Scheffer recently told investors in a conference call. “As difficult as these actions are now, I’m confident we are positioning the business for success,” he says. The consolidation will cause pretax restructuring and impairment charges of $6 million to $8 million in the second half of this year.
Financial strength
Stanley Furniture already has respectable financial strength. It has about $3.28 a share in cash, or around $33 million compared to debt of about $29 million. It produced $4.7 million in operating cash flow last quarter and $25 million over the past 12 months.
The stock carries a 5.2% dividend yield.
Stanley Furniture also has a $19 million stock buyback plan in place. But it seems to be holding off on buying despite the pullback in the stock, to preserve financial strength. “We believe now is the time to be more conservative and to maintain a very strong financial position as we work our way through the current business environment,” says Scheffer.
When times get better, the company plans to return to habit using its cash to reward shareholders. “We’ve got a long history of generating very positive cash flow streams and of returning those cash flow streams to our shareholders’ through stock buybacks and cash dividends, says Scheffer. “I would not foresee us changing our thinking or the way we manage the business going forward in that regard,” he says.
Some of the savvier players in value investing own this stock, including Third Avenue Management, T. Rowe Price and Muhlenkamp & Co.
Other insider purchases of note
- While many analysts expect more big problems for the banking sector, the head of Wachovia (WB) seems to think the worst may be priced in at this point. On July 22, Wachovia chief Robert Steel bought $16 million worth of his bank’s stock at around $16 a share.
- Shares of the online advertising company ValueClick (VCLK) hit the skids lately, gapping down recently to $10, from about $15 at the start of July. The stock is down from $30 last October. At these levels, several insiders stepped up and bought over $1 million worth of stock. The buying, however, was mainly a $1 million purchase by a single director.
The bottom line: When a savvy insider like Prillaman makes a significant purchase, it’s worth thinking about following him. Things are still so uncertain about the economy you may not see instant gains, of course. But his buying suggests you will be a winner in a year or two.
Disclaimer
At the time of publication, Michael Brush owned shares of several T. Rowe Price mutual funds. Mr. Brush is an independent columnist for this web site. For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
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