Sorry, It's All Baked In

 | Mar 12, 2013 | 9:30 AM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

eth

When you think of Ethan Allen (ETH), you might think of Ethan Allen and the Green Mountain Boys who captured Fort Ticonderoga in 1775 while the British were sleeping. Or, perhaps, you might think of the furniture maker whose shares just made a five-year high Monday. The stock is back to its pre-Great Recession level -- up 8% year to date, with the momentum hounds nipping at its heels. What's going on?

Ethan Allen reported a mixed quarter at the end of January. Although the company beat the consensus estimate by $0.01, Hurricane Sandy really took some momentum out of its sales -- revenue rose 4.4% to $191.3 million, in line with estimates, and many were disappointed with the weak operating margins. In the fiscal first quarter (ended September), the company was able to grow operating margins 300 basis points, and guidance for the December quarter pointed to more of the same. But Ethan Allen only delivered 110 bps. If not for the lower tax rate, it would have missed the quarter.

The bulls overlooked the mixed results and bought the shares on the thesis that an improving housing market would carry the stock higher. So far, they are right. But if you take a closer look, the bullish housing thesis has a long way to go.

During the 2006 peak for both housing and the stock market, the U.S. had completed 1.979 million housing units. Today, the most bullish forecasters think we can build 1.2 million units in 2013, with the overall consensus calling for around 1 million. We would need an 85% increase in home completions to reach the bulls' goal, as we only built 650,000 homes in 2012.

Ethan Allen is currently trading for around $30. In 2005, the U.S. was building 1.9 million units, yet Ethan Allen stock was only in the low $30s, and it took the 2006 housing bubble to push the stock to $45.

In other words, 1.2 million housing units for 2013 looks already baked into the stock price. Getting the stock into the mid-$30s would take something like 1.5 million units, and that isn't likely to happen until 2014 or 2015. Right now the stock is riding a wave of market momentum. Don't be surprised when Ethan Allen storms the fort with a big correction and wakes up the sleeping bulls.

Columnist Conversations

My view of the market hasn't changed at over the past few days. I continue to believe short term traders shoul...
Here is a chart of the VIX and its relationship to the S&P 500 index that illustrates your point. ...
This morning PANW announced the availability of its new revolutionary advanced endpoint protection offering ca...
Lang:
Over the past few years I have talked about spike peak events in VIX as being great buying chances. If you lo...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.