CD’s & Cash

bank

After the run-up in the market, there are no longer a lot of bargains.

I also think a recession is coming in the next couple of years, so I don’t want to take on unnecessary risk and would like to gradually unwind. I want to have plenty of cash to take advantage of the next downturn.

Additionally, looking at some of the mistakes in my portfolio, I noticed that they all happened when I bought subpar stocks just to stay 100% fully invested. Looking back on it, I would have been better off if I only purchased the bargains I felt were compelling, as I did with the stocks purchased in December 2018. I would have been better off if I held more cash and only bought when I had more conviction.

Thinking about all of this, I turned to the writings of Seth Klarman for advice. I think he nailed it with these quotes about this topic:

“Our willingness to hold cash at times when great opportunities are scarce allows us to take advantage of opportunity amidst the turmoil that could handcuff a competitor who is always fully invested.”

“It wouldn’t be overstating the case to say that investors face a crisis of low returns: less than they want or expect, and less than many of them need. Investors must choose between two alternatives. One is to hold stocks and bonds at the historically high prices that prevail in today’s markets, locking in what would traditionally have been sub-par returns. If prices never drop, causing returns to revert to more normal levels, this will have been the right decision. However, if prices decline, raising prospective returns on securities, investors will experience potentially substantial mark to market losses, thereby faring considerably worse than if they had been more patient.”

So, I moved $1,992.16 into short-term CD’s that mature in December with a 2%+ yield to maturity. The mid-December maturity coincides with my standard portfolio rebalance. Hopefully, at that point, more bargains will be available.

I considered moving towards a long-term bond ETF, but that is an outright speculative bet that a recession will happen. I think a recession is a likely outcome in the next 1-2 years, but I do not think I should make an outright speculative bet on that outcome.

For now, I will stick to the traditional value investing strategy. When I can’t find a new bargain, I will hold cash and cash instruments like CD’s and short term bonds. I will resist the impulse to stay fully invested at all times.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Hooker Furniture (HOFT)

couch

Key Statistics

Enterprise Value = $358.61 million

Operating Income = $49.48 million

EV/Operating Income = 7.24x

Price/Revenue = .53x

Earnings Yield = 10%

Debt/Equity = 15%

The Company

Hooker Furniture is a Virginia-based furniture company that has been in business since 1924. They own multiple brands. Their line of Hooker branded furniture includes items for home entertainment, home office, accent, dining, and bedroom. They also own an upholstery segment and acquired the Home Meridian brand in 2016.

Hooker primarilly sells their furniture to other retailers without the burden of a massive physical brick and mortar footprint. They sell their furniture primarily to independent furniture stores, department stores, warehouse clubs, and e-commerce retailers. Their furniture is featured prominently on Wayfair, for instance.

The stock has been punished since last fall due mainly due to macro moves in the broader market that aren’t showing up in the actual operating results of the company.

My Take

Hooker Furniture is a business with a bright long term future. I really like the fact that they don’t have a big physical brick and mortar footprint. This keeps them versatile as brick-and-mortar stores face pressure due to mounting threats from e-commerce. As furniture demand dries up in the stores, they should be able to quickly replace that demand with more sales to online businesses.

Hooker Furniture also has a solid long term track record. They never suffered a loss during the Great Recession, and have grown steadily through every year of the expansion. Their acquisition of Home Meridian is a smart move and was completed while maintaining a conservative balance sheet. The company earned $2.42/share last year, which compares to a $.80/share 5 years ago.

The risk is that this is a cyclical business. The yield curve just inverted and we are likely to have a recession in the next two years if past history is any guide. Despite this risk, when I saw this company show up in a few of my stock screens, I couldn’t resist it when I did more research. At current multiples, it’s too compelling of a bargain to pass up. It’s indeed an excellent company at a bargain price.

From a relative valuation standpoint, Hooker’s current P/E of 10.40 compares to a 5-year average of 17. The current P/E is also significantly below the P/E of competitors in the industry, such as Flexsteel, which trades at a P/E of 24. Another competitor would be Basset Furniture, which currently trades at a P/E of 19. An increase in P/E to the 5-year average would be a 63% increase from current levels. A P/E of 15 seems right for a steadily growing, well run, conservatively financed, and versatile company like Hooker furniture.  HOFT also trades at 53% of sales, which compares to an industry average of 72%. On an enterprise multiple basis, Hooker’s current 7.24x multiple compares to a 5-year average of 10.67. An increase to this level would be a 47% increase from current levels.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

AGX

I reduced my exposure to Argan (AGX) today. After the price run-up, the position had grown to about 8% of my portfolio. I sold the block of it I purchased on 3/23/18.

I sold 25 shares @ $50.94 for a 30% gain from the purchase price a year ago.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.