Long Shot: Pull Up This Cash-Rich Chair

 | Aug 08, 2012 | 2:30 PM EDT  | Comments
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Real Money's Long Shot column is dedicated to trading ideas that are highly risky, but which present an opportunity for significant payoff if they work. Such ideas are sometimes characterized as "lottery tickets" and are for only the most risk-tolerant investors, as the potential for 100% loss is high.

For months now, trickles of data have been suggesting that housing prices are stabilizing and buying activity is picking up. As far as I can see, there is really one singular piece of data that matters most: The cost of renting vs. that of owning. The strong preference to rent over the past several years came due to rental prices that were significantly lower than the cost of ownership. That dynamic is changing as a strong rental market has reinvigorated the attractiveness of home ownership. Anecdotally, just yesterday, a hospital-lab-worker friend who just moved back to Atlanta said she decided to buy a house because it was cheaper than renting one.

The stock market, an anticipatory creature, has responded to the uptick in housing by lifting shares of companies that serve as leading indicators -- homebuilders and construction-related stocks. If housing continues to strengthen, the businesses next in line to benefit will be the companies that I classify as focusing on the interior of the home, rather than the exterior. One such industry is the furniture business, and today's long shot idea, Stanley Furniture (STLY), could be a big winner.

Stanley describes itself as a furniture company offering a value product in the premium segment of the space. In other words, Stanley sells high-quality furnishings, which is what many people want when augmenting their most valuable asset. Stanley has two brands -- the namesake Stanley brand and Young America, which focuses on children's furniture. Over the past year, the company embarked on a major restructuring effort that included outsourcing the production of its Stanley brand and manufacturing 100% of Young America furniture in the U.S. The company believes that, when it comes to infant and children's furniture, parents value safety above all else -- and the only way to ensure that these products meet the highest standards of safety is for the company to control the production process.

Stanley's sales have been in decline since 2007 for obvious reasons. But with its new plan in place, and with housing slowly on the rise, the next several years could be very favorable. Moreover, the valuation is currently dirt-cheap: Shares trade at $4, valuing the company at $60 million. A windfall came in the second quarter, as well. Years of litigation had withheld a payment by U.S. Customs and Border Protection for Stanley's support of an antidumping petition regarding China furniture imports -- but earlier this year, Stanley received its $40 million distribution. As a result, the company's balance sheet now has $47 million in cash and short term investment, and no debt. For $4 a share, you'd be getting more than $3 cash per share, book value of more than $6 per share -- and you'd be paying less than $1 a share for the business.

Operating results continue to move toward profitability, with a $1.4 million operating loss in the second quarter. Today you'd be payin for a business with a $15 million enterprise value with annual sales of some $100 million. A return back to profitability will likely send shares soaring. Furthermore, with cash of more than $3 per share, management could easily pay out a very attractive special dividend and still have plenty of cash left over. No matter how you look at it, Stanley is a "heads, you win big; tails, you loss very little" investment opportunity. 

Please note that due to factors including low market capitalization and/or insufficient public float, we consider ­­­­STLY to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

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