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Isn’t this a little too much?

February 8th, 2011 · No Comments

We know retail sales are somewhat better than expected but a stock near doubling in just over a week..
And that in the home furnishing business?

Indeed.

The stock is Bassett Furniture Industries (BSET). It lingered in the dark afterlife of the economic crisis and the housing plunge, but shot back to live on January 27, with the following news (from Reuters):

* Q4 sales up 11 pct

* Says negotiating selling 46.9 pct stake in IHFC

* Shares up as much as 24 percent

Jan 27 (Reuters) – Home furnishings retailer Bassett Furniture Industries Inc (BSET.O) posted a smaller quarterly income but saw sales rise, and said it is negotiating the sale of its interest in International Home Furnishings Center (IHFC), sending its shares up as much as 24 percent.

Shares of the company were up $1.04 at $5.59 on Thursday morning, making them the third highest gainer on Nasdaq.

The Bassett, Virginia-based company saw fourth-quarter sales rise to $66 million from $59.5 million a year ago, driven by a rise in wholesale shipments as well as company owned stores. [ID:nASA01G50]

“While we do not believe that the overall pace of sales has improved significantly on an industry-wide basis, we are making progress on several fronts to grow our top line,” Chief Executive Robert Spilman said in a statement.

Earlier in the week, rival Ethan Allen Interiors Inc (ETH.N) pointed to a strong start to its third quarter, and saw sales surge 21 percent. [ID:nSGE70J0CR]

The company is also negotiating the sale of its 46.9 percent interest in International Home Furnishings Center Inc.

IHFC operates a home furnishings trade show complex, and is based in High Point, North Carolina. Bassett is one of four shareholders of IHFC.

———[End of article]———–

The stock wasn’t done after that monumental rise, not by a long shot. It kept on rising. We look for additional reasons for the optimism in the PR:

The Company reported net income of $1.9 million, or $0.17 per share, for the quarter ended November 27, 2010, as compared to net income of $2.6 million, or $0.22 per share, for the quarter ended November 28, 2009.

But there were a whole host of one-time items ‘polluting’ those figures:

Excluding these items, the net income for the quarter ended November 27, 2010 would have been $2.3 million as compared to net income of $1.7 million for the quarter ended November 28, 2009.

Will it last?

“We are pleased to report an 11% sales increase for the fourth quarter of 2010,” said Robert H. Spilman Jr., President and CEO. “While we do not believe that the overall pace of sales has improved significantly on an industry-wide basis, we are making progress on several fronts to grow our top line.

Well, so this is a typical US stock story, where rationalization is behind benign numbers in an overall sluggish market. Some further data:

  • Debt and cash almost cancel one another out (at $13.8M and $11.1M respectively)
  • 11.42M outstanding shares with a market cap of just $89M, which is a modest 0.38 times sales
  • Only 2.25% of stock held by insiders and just 14K short (as of Jan 14, these will not be happy campers..)

Cash-flow is rather nice, but can that last?

The Company generated $6.1 million of cash from operating activities during the fourth quarter of 2010, primarily due to improved collections from wholesale customers as order backlogs were reduced, tighter working capital management, and the receipt of a $1.7 million Federal income tax refund

Looking at the graph, you will immediately notice that the RSI, at 93, does suggest the stock is just a tad overbought at the moment.

Just to appreciate the impact of the housing bust and economic crisis, the three year graph shows the fall from grace and that the recent rapid comeback hasn’t even made up for lost time. Before the crisis, the stock was in the low teens:

There are a couple of reasons why we think that selling a few call options, although certainly not without risk, could be profitable:

  • Technical: the stock is heavily overbought
  • Fundamental: is the housing market really back to health? We don’t think so.

However, if the company continues to do what they’ve done and manages to squeeze out more returns from rationalization, the stock is not expensive (nor cheap). If the housing market starts to improve (something we don’t expect for quite some time), they could even go back to the low teens from before the crisis.

For the moment we think this thing is due for a breather after a dramatic rise like this..

Tags: Technical Trading Ideas