I live in the Northeast region of the United States. Having
purchased a home in 1998, I experienced firsthand the wild
priceappreciation between then and early 2006.
Homes in my neighborhood tripled in value during this heady
time. Nothing seemed financially impossible with soaring home
prices andlenders throwingmoney at the fortunate homeowners. I
remember randomly receiving a pre-qualifiedcredit card with a
$100,000home equity credit line attached to it. All that was
needed to access that money was a phonecall and a
Well, it sure was fun while it lasted.
As quickly as this gold rush started, it ended. Home prices
began falling, andunderwater 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-ruiningforeclosure proceeding.
A domino effect ensued, with prices plummeting and excess
housing supply quickly outstripping demand. The
S&P/Case-Shiller Home PriceIndex plunged to its lowest level
at the end of 2008.
But it now looks like things are turning around. New-homesales
hit their highest level in five years in June. The National
Association of Realtors has forecast a 5% increase in home sales
nextyear . 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 toprofit are starting to
I like to search for opportunities around a centralbullish
economic theme. So in this case, I asked myself, "What other
industrieswill 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 myhome 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
The leading company in this industry,
Mohawk Industries (
boasts amarket cap of more than $9 billion, and itsstock is up
nearly 65% over the past year. However, at nearly $130, the share
price precludes many investors from making a substantial
long-terminvestment in the company. Using this performance as a
guide, I scanned for lower-pricedstocks in the same business with
The company I discovered astounded me: It's up more than 220%
in the past year, andshares 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 amarket cap of about $143 million and annualrevenue of just
over $296 million. It sells carpets with the Fabrica
International, Masland Residential and Dixie Home
Dixie posted impressive second-quarter results: Sales were up
26%year over year , andearnings came in at $0.13 per share
compared with a loss of $0.03 a share for the same period last
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
inanalysts hiking their estimates, creating a bullish environment
for DXYN across the board.
Risks to Consider:
Dixie relies on the continual improvement of theeconomy to
maintain its growth trajectory. Should there be adowntick in the
overall economic picture, particularly housing, Dixie shares may
slip downward. In addition, it's important tonote that the
company's chief financial officer recently sold 6,000 shares.
While this is a minor amount and shares have traded higher since
thesale , 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,
creatingthe wealth effect mentioned earlier. Combine this with
the increasingly bullish housing market, and it creates a
compelling picture for DXYN.
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