I live in the Northeast region of the United States. Having purchased a home in 1998, I experienced firsthand the wild price appreciation between then and early 2006.
Homes in my neighborhood tripled in value during this heady time. Nothing seemed financially impossible with soaring home prices and lenders throwing money at the fortunate homeowners. I remember randomly receiving a pre-qualified credit card with a $100,000 home equity credit line attached to it. All that was needed to access that money was a phone call and a drive-by appraisal.
Well, it sure was fun while it lasted.
As quickly as this gold rush started, it ended. Home prices began falling, and underwater homeowners scrambled to maintain their equity-driven lifestyles. Prices continued to drop, forcing many credit-foolish owners to sell at a devastating loss or face a credit-ruining foreclosure proceeding.
A domino effect ensued, with prices plummeting and excess housing supply quickly outstripping demand. The S&P/Case-Shiller Home Price Index plunged to its lowest level at the end of 2008.
But it now looks like things are turning around. New-home sales hit their highest level in five years in June. The National Association of Realtors has forecast a 5% increase in home sales next year. In addition, prices are starting to move higher with housing prices in the 20 largest U.S. cities up more than 12% in June from the same period a year earlier. While this industry has a long way to go, opportunities to profit are starting to accumulate.
I like to search for opportunities around a central bullish economic theme. So in this case, I asked myself, "What other industries will benefit from steady upticks in housing?" There are many different businesses that fit this description, so I looked for the top-performing companies related to housing.
What I discovered surprised me. I was standing on the product of one of these top companies in my home office. That's right, carpet. It isn't something I think about very often, but carpet is part of the features in nearly every home and commercial building.
The leading company in this industry, Mohawk Industries (NYSE: MHK) boasts a market cap of more than $9 billion, and its stock is up nearly 65% over the past year. However, at nearly $130, the share price precludes many investors from making a substantial long-term investment in the company. Using this performance as a guide, I scanned for lower-priced stocks in the same business with similar performance.
The company I discovered astounded me: It's up more than 220% in the past year, and shares are trading for around $11. It is high-end carpet maker The Dixie Group (Nasdaq: DXYN). Founded in 1919, this carpet manufacturer and marketing company has a market cap of about $143 million and annual revenue of just over $296 million. It sells carpets with the Fabrica International, Masland Residential and Dixie Home brands.
DXYN is being driven upward not only by the housing market but also by the soaring stock market. Dixie specializes in the high-end segment of the housing and commercial markets, and many owners of high-end properties are also stock investors. Surging stock prices create a "wealth effect" that results in homeowners upgrading their homes with high-end furnishings, including carpet. In addition, Dixie's recent outperformance has resulted in analysts hiking their estimates, creating a bullish environment for DXYN across the board.
Risks to Consider: Dixie relies on the continual improvement of the economy to maintain its growth trajectory. Should there be a downtick in the overall economic picture, particularly housing, Dixie shares may slip downward. In addition, it's important to note that the company's chief financial officer recently sold 6,000 shares. While this is a minor amount and shares have traded higher since the sale, the action is something to keep in mind.
Action to Take --> I love this stock on a breakout close above $12 with a 12-month target price of $17. Placing initial stops just below $10 makes sense. With the Federal Reserve assuring the market of no immediate tapering, stocks should continue to push higher, creating the wealth effect mentioned earlier. Combine this with the increasingly bullish housing market, and it creates a compelling picture for DXYN.