Feathering Your Nest and Your Portfolio
By Sam Stovall
The latest industry to join the list of those with top Standard & Poor's is Home Furnishings. S&P analyst Efraim Levy is "modestly bullish" on this group in the near term, although his opinion varies on the individual stocks in the industry.
Investors have appeared comfortable with this group in a rough market. Year to date, through Feb. 22, 2002, the the S&P Home Furnishing index was up 7.4%, vs. a 4.8% decline for the S&P 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600). In 2001, the industry index also outperformed the broader market.
What allowed the index to top the market in recent months? Levy ties it mainly to sharp increases in the share prices of two index components: Mohawk Industries (MHK ) and Springs Industries. Carpetmaker Mohawk's shares, which carry an S&P recommendation of 5 STARS (buy), have been on a roll since September, 2001, thanks to some better-than-expected earnings news and its announcement of a deal to acquire tile producer Dal-Tile (DTL ). Springs' shares climbed after the sheet-and-towel maker's board agreed to a deal in which the company was taken private in September, 2001.
Levy notes that the current consolidation wave kicked off with the January, 2001, acquisition of former index member Shaw Industries by an investor group led by Warren Buffett's Berkshire Hathaway.
The performance of the home-furnishings industry is influenced by the housing market's strength, which in turn responds to changes in interest rates. Although U.S. housing sales fell sharply in the wake of the September 11 terrorist attacks, subsequent rate cuts have buoyed the market to surprisingly strong levels. But Levy says a downtrend in consumer confidence -- the Conference Board's closely watched index remains well below its May, 2000, peak -- has restrained sales of furnishings despite the strong housing market.
Other strikes against the domestic home-furnishing industry include minimal pricing power and low net margins, as it competes with foreign-manufactured goods, which benefit from cheap labor and government subsidies. To remain competitive, American home-furnishing companies have been investing substantial capital in new machinery and information systems. Levy expects that increased efficiency will help companies to consolidate production into fewer domestic manufacturing facilities.
Over the long term, Levy thinks recent cuts in interest and tax rates could help boost this sector's slow performance. In the near term, he says companies with the cash flow to make acquisitions, reduce debt, or repurchase shares will continue to exhibit the strongest growth.
S&P Relative Strength Rankings
These industries carry six-month relative strength rankings of "5" as of Feb. 22, 2002 -- meaning that they're in the top 10% of the 115 industries in the S&P Super 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600) based on prior six-month price performance.
* S&P's ranking system for the appreciation potential of stocks over a 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell).
Stovall is chief sector strategist for Standard & Poor's