2 Stocks to Buy on The Dip: One a Value, the Other High-Yielding

Furniture stocks The Lovesac Company NASDAQ: LOVE and Hooker Furnishings NASDAQ: HOFT are lower following their Q4 reports opening a buy-the-dip opportunity. Near-term headwinds hamper these stocks, but they are rapidly improving their operational quality and building leverage for a rebound expected to begin soon. 

The timing is uncertain, but the FOMC shift to lower rates is expected to happen this year and lead to recovery in the housing and ancillary markets like furnishings and furniture. Because they have shored up fortress balance sheets and built leverage for growth, the rebound in share prices could be substantial. 

The Lovesac Company Provides Value: Capital Returns to Follow

One of the attractive qualities of the furniture industry is its capital returns. Most furniture makers pay a substantial dividend, but not The Lovesac Company. It is still in its growth phase,  reinvesting in the business and producing solid results. The Q4 results are mixed, and the outlook for FQ1 is tepid, but the 15% increase in store count and wider margins are a lever for growth that should be noticed. 

The company was able to sustain growth in a no-growth environment because of the store count; when growth returns to the industry, The Lovesac Company will lead and stand to gain market share. Because it is profitable now and maintains a fortress balance sheet, nothing can stop it from initiating a dividend when its growth targets are achieved. 

The lack of dividends plays into the stock’s valuation—shares of LOVE trade at about 14X earnings compared to Hooker Furniture, which trades at 18X earnings. Hooker Furniture is a high-yield with a payout near 4.5%, and it has been increasing its payout annually.

Critical details from The Lovesac Company’s Q4 results include 5% top-line growth and a better-than-expected margin. The company widened its margin despite an increase in SG&A and delivered accelerated growth on the bottom line. Net income grew by 18% and GAAP earnings by 17% to outpace the Marketbeat.com consensus despite weakness on the top line. 

Balance sheet details also favor a rebound in the share price. The company's cash flow is positive and produced a near-doubling of cash compared to last year. The cash build is also due to an inventory reduction that has the company in a lean operating condition. Other highlights include current and total assets up, liabilities down, and equity up 18%. 

Hooker Furnishings Struggles in Q4; Makes Critical Decision

Hooker Furnishings posted an industry-leading decline in FQ4 due primarily to weakness in the market and the decision to cut unprofitable sales. The cut in sales is responsible for 660 basis points of the full-year decline but had the positive impact of improving margin. The company also reduced its inventory during the year to aid balance sheet improvements that have it set up to continue paying its dividend. The balance sheet highlights include cash that has more than doubled and falling liabilities. Leverage is low at less than 0.5X cash and 0.1X equity. 

The risk with Hooker is that the dividend distribution is nearly 100% of earnings. The company is expected to pivot to growth this year, but the ratio may only fall substantially in the back half of the fiscal year. However, the company has indicated its intention to pay meaningful dividends, so a distribution cut is not expected, although large increases should not be expected until business recovery commences. 

The price action in HOFT fell about 4% after the news and set a new low, but investors are buying the dip. Price action is supported by increased volume in an oversold market, suggesting a rebound will commence soon. Assuming support holds at $20, the market could move quickly to $22 before consolidation. If not, a move to lower prices near $18 is likely.