'Underweight' stocks don't reflect true values
Jerry Epperson -- Furniture Today, February 23, 2009
Every day I face some tough decisions. At lunch, should I get a Subway $5 foot-long sub and a drink or, for the same money, buy a single share each of Furniture Brands, La-Z-Boy and Bassett for a total of $6.25?
Instead of a bigger meal, I could get a single share each of Sealy, Tempur-Pedic and Select Comfort for a total of $8.50. In the evening, I could buy a movie ticket or a share of Hooker, Haverty, Stanley or Flexsteel.
The only stock winners in this environment are the recession plays, as Wall Street sees them — Aaron Rents and Rent-a-Center.
In 2002, the combined value of all the U.S. public furniture companies was over $6 billion, but today they total well less than $1 billion. Managements are working harder but their stocks are worth less.
In social terms, this is the equivalent of Wall Street calling us and our children ugly. It is difficult to not be offended.
Most foreign furniture stocks are not faring any better. After all, over the last year the stock markets in China fell 60%, in Europe 40%, and in the United States 35%.
Part of this is the structure of today's investment community. In the 1960s and 1970s, the dominant investors were individuals, typically wealthy persons who not only had investments, they owned and ran companies. They recognized value and invested with a long-term perspective. Yes, there still were fads and hot stocks. Furniture stocks were among the hottest stocks in 1971–1972, thanks to the Levitz brothers.
Today, everyone who is employed has some form of deferred compensation in the form of a profit-sharing plan, 401(k), ESOP or pension plan that is professionally managed, usually through a mutual fund or a bank. Small to mid-sized portfolios are pushed towards mutual funds, and large investors have professionals who position their investments optimally for tax and estate reasons. Except for day-traders (a dying breed these days), individual investors are getting harder to find.
Most professional investors choose sectors within the stock market that they think will be growing and "overweight" (increase the proportion of the portfolio) that sector.
Because home furnishings are related to both consumer credit and housing, two sectors that both are severely out of favor, our stocks have been "underweighted" to the point that we have almost disappeared.
Today's stock prices do not recognize the true value of the companies, their assets or brands, but someday they will. Just watch what happens when there is a trickle of good news on housing turnover or consumer spending. Then we will be pretty again, and we will probably not be "underweight" for long.
Underweight is not a word I hear often, by the way.
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