Americans will never forget the real estate market crash.
After 50-plus years of appreciating real estate assets, the
bottom finally fell out, surprising nearly everyone. Foreclosures
were rampant as homeowners were unable or unwilling to make
payments as home prices rapidly depreciated.
The plunging housing prices forced the entire economy into a
deep recessionary period. However, no sectors were more damaged
than the businesses that depend on a thriving housing market to
I am talking about builders, contractors, landscapers and a
host of other businesses that provide services, products and
create value for homeowners. These businesses depend directly
upon rising or at least steady home prices.
One such company is the
Dixie Group (NYSE:
. This company specializes in manufacturing and selling rugs and
carpets to residential and commercial customers. Dixie sells
under the brand names Fabrica International, Masland Carpets and
The real estate crash decimated Dixie's stock, sending shares
of DXYN plunging below $2 during the real estate crash. Price has
slowly worked its way back to as high as $18 at the start of 2014
as the real estate market improved.
However, DXYN has fallen from its recent highs, aided by a
slowdown in real estate growth in the first quarter. This
pullback has set up an ideal buying opportunity.
Residential housing is back on the growth track after
struggling in the first quarter. The latest data from the
S&P/Case-Shiller Home Price Index
indicates housing prices have posted increases in all 20 cities
that are tracked.
In addition, purchases of pre-owned homes rose nearly 5% in
May, marking the largest gain since August 2011. Borrowing costs
have fallen since the start of this year, which should also help
David Blitzer, a real estate dealmaker at private equity giant
Blackstone Group and chairman of the Case-Shiller index
: "Near-term economic factors favor further gains in housing:
Mortgage rates are lower than a year ago, the (Federal Reserve)
is expected to keep interest rates steady until mid 2015 and the
labor market is improving." However, he added a caveat: "Housing
is not back to normal."
Blitzer's statement is particularly encouraging as it reduces
worries of the potential of another real estate market bubble and
implies that housing is still bouncing back to just the normal
Internationally, the housing market is also bouncing higher
from the recession lows. The most recent data from the
International Monetary Fund indicates that global housing prices
have climbed seven consecutive quarters.
As you can see in this IMF graphic, the United States stacks
up well against the rest of the world in the housing
On top of this bullish data, U.S. consumer confidence soared
to its highest level in over six years in June. In addition the
Commerce Department just reported that new-home sales exploded by
18.6% in May to a seasonally adjusted annual rate of 504,000
units, the highest level since May 2008 and the biggest increase
in sales since 1992.
Markets, real estate included, rarely go in a straight line
higher. What happened in the first quarter, when the Fed spooked
the market by intimating that it may cut back on its monetary
easing, is perfectly natural in a bullish market. Profit-taking
and fears stemming from short-term news are inherent parts of
every financial market and should cause little concerns.
However, these pullbacks can be used by savvy traders to
purchase related stocks -- like DXYN -- at a discount.
The Dixie Group is well entrenched in the carpet and rug
business with a vertical manufacturing model (meaning that it's
involved at every step of the manufacturing process, from raw
material to finished product). It boasts a market cap of just
under $144 million but annual revenue of nearly $355 million and
gross profit of $85.6 million. The quarterly revenue growth is
just over 13%. However, the operating cash flow comes in at a
negative $6.8 million over the past 12 months.
Clearly, the company was hurt by the real estate crash and has
been fighting its way higher ever since. A recent stock offering
of 2.5 million shares at $10.65 certainly didn't help to keep
prices near the recent highs.
The good news is Dixie's domestic carpet sales have grown 69%
since the bottom of the recession in 2009. In addition, the
company's focus on the high end of the carpet market has helped
increase profits and earn a valuable niche in the industry. As
the housing market continues to improve, Dixie should revisit its
recent highs in the not-too-distant future.
The technical picture is extraordinarily bullish. A triple
bottom is evident on the daily chart at the $10.50 level. Price
has pushed into the mid-$11 level and appears to be building
another support level at $11.
Risks to Consider:
Carpet is slowly losing its popularity with homeowners. What
was once considered a must has given way to wood and other hard
flooring materials. However, this sea change in consumer tastes
will likely take years to show up in Dixie's sales.
Action to Take -->
Buy DXYN between $11 and $11.50 with stops at $10.40. I expect
price to climb the ladder back up to the $18 range within the
next 52 weeks, which represents upside of better than 60%.
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