What's In Store For The Home - Brief Article - Statistical Data Included

Kiplinger's Personal Finance Magazine, April, 2001 by Joan Goldwasser

STOCKS | Plump up your portfolio with makers of UPSCALE FURNISHINGS.

FALLING interest rates might suggest that it's a good time to buy home-building stocks. Wrong. Last year was the sweet spot for these stocks, when long-term interest rates began their decline. Because these stocks rose 56% as a group last year, "it is too late to be a buyer," contends Brown Brothers Harriman analyst Francois Trahan. The next direction for the sector, he suggests, may be down.

More people buy homes when they believe the economy is thriving and they are confident about their jobs. Right now, consumer confidence is at its lowest point in almost five years. Only the largest builders--such as Centex (CTX) and Lennar (LEN), both of which are geographically diverse, with healthy earnings and substantial backlogs--might qualify as timely picks, says Gregory Nejmeh of Deutsche Banc Alex. Brown. And Centex has diversified to the point that 38% of its profits come from mortgage lending, title insurance and home services, such as pest control.

Instead, consider investing in companies that make things that go inside the home rather than the home itself--furniture, carpets and textiles. Sales of furniture and other home furnishings typically lag new-home purchases by up to 15 months. This group declined 24% last year, but analyst Stephen East of A.G. Edwards believes the stocks can appreciate 20% to 35% in 2001.

Part of the reason for the current appeal of furniture stocks is that their prices had been beaten down so far. As Keith Hughes of SunTrust Equitable Securities says, "They are ridiculously cheap." But you should be selective because earnings for these companies won't perk up before the second half of the year.

Hughes and East recommend high-end furniture producers, such as Ethan Allen (ETH) and Furniture Brands (FBN), because consumers with more disposable income are less affected by rising energy costs and gas prices, and are more likely to continue shopping. Furniture Brands, which makes the upscale Thomasville, Broyhill and Lane furniture lines, should also benefit from a new licensing agreement with Home Depot, which will sell its higher-end cabinets under the Thomasville name. Masco (MAS), which makes the cabinets for Furniture Brands, will also benefit from the Home Depot exposure. And lower interest rates, which spur homeowners to refinance their mortgages and undertake remodeling projects, should also stimulate sales of Masco's Merillat cabinets and Delta faucets.

Carpet stocks' fortunes should also be in for a boost. Though the stock of Mohawk Industries (MHK), which has the second-largest market share in the industry, is up 60% from its 2000 low, it may still have upside potential. Mohawk is moving into the fast-growing flooring business.

As a rule, textile stocks drop before the overall economy weakens and rise before it strengthens. Analyst Kay Norwood of Wachovia Securities recommends Springs Industries (SMI), the maker of Springmaid and Wamsutta towels and sheets. It has a solid balance sheet with no debt and a 4% dividend yield. Although the stock has increased 50% from its 52-week low (despite disappointing sales in the fourth quarter of 2000), Norwood sees it hitting $40 over the next year.

--Reporter: ERIN BURT

COMPANY                 RECENT   EARNING'S   P/E
                        PRICE    PER SHARE   RATIO
                                 2001(*)

Centex                  $41       $4.93        8
Ethan Allen Interiors    37        2.38       16
Furniture Brands         26        2.25       12
Lennar                   37        4.39        8
Masco                    24        1.39       17
Mohawk Industries        32        3.36       10
Springs Industries       35        3.92        9

*estimates SOURCE: First Call/Thompson Financial. Data to Feb. 1