By: Bill Spencer — October 5, 2019
Happy Saturday friends...
The baseball post season is upon us, and I'm more than normally excited. I'm a Met fan... but I'm also a life-long New Yorker, so... go Yankees!
If you're no fan of baseball, you still have a lot to be excited over -- today's small-cap stock.
This company makes and sells boutique-quality furniture for homes and offices, and it's one of the best at what it does.
The stock checks almost all our "high-quality" boxes -- It's in a hot sector... It is outperforming the market and its sector peers... funds are accelerating their share purchases... it's approaching new highs on its price chart...
Best of all, it boasts a savvy management team that I’ve become quite familiar with lately (but that’s another story). In addition to being genuinely nice and generous people, they’ve been flawlessly executing a strategy of "growth through acquisition".
The company has inked four major deals since management caught my ears in 2014.
The stock is up 35% since the beginning of the summer season and has pulled back a bit since the start of October. Even if the stock pulls back some more from here, the current price is still great, as I think the stock will go on to break its highs.
I think we'll see this stock climb at least another 35% -- 50% by early next year.
In the meantime, we can enjoy a 2.82% dividend yield. Remember, the stock market averages about 7% to 9% (if you time your entry well) over the long-term so the dividend already covers ⅓ of that return...
The Household Goods sector is a sub-sector of the broader Consumer Non-Cyclicals (or Consumer Staples) sector.
If you’re looking to diversify and you don’t have much exposure to Non-Cyclicals, this is your opportunity. The sector is also a good hedge against a declining stock market. But today, we aren’t even playing the sector for a hedge.
(Click any image to enlarge)
The chart is in an X column (at the far right), meaning the sector is strong over the short-term. Also, that current X column is higher than the previous one (the blue number '7' in the X column to the left).
That means the sector is strong over both the shorter-term as well as the longer-term, because more stocks in the sector are participating in this current upward move than had participated in the previous up move.
The company is Knoll, Inc. (NYSE: KNL), which operates 4.2 million square feet of manufacturing plants, warehouses and sales offices throughout the world.
It's been in business more than 80 years and keeps getting better with age. Last year KNL set a record for Q4 shipments and year-end sales. Net revenue for 2018 was $1.3 billion, up 15% from 2017.
Andrew Cogan, the Chairman and CEO of Knoll reported operating profit for 2018 at $115.2 million, up 43% year-over-year.
Not surprisingly, Knoll beats earnings estimates as a matter of routine.
This helps explain why, of the 92 stocks we track in the narrow Household Goods sector, over the past six months Knoll has outperformed 81 of them -- 89%.
That in turn shows why...
So far this quarter major funds have accumulated almost three times more of the stock than they've distributed -- $62 million versus $23 million.
That's an increase of 35% from the previous quarter, and an increase of 145% from the same quarter in 2018.
I have a good relationship with the firm and I feel like that’s the case with many large institutional investors.
While the number of funds invested in this stock increased from 322 to 377 funds (15%), the dollar amount funds invested more than doubled. They seemed pretty confident about the future, and it turns out they were right.
Now YOU have a connection to the firm because I’ll start reporting whatever I’m allowed to report to you, about my regular conversations with Knoll...
Knoll boasts seasoned, reliable management and a stable customer base which includes the U.S. federal government as well as state and other municipal governments.
That's not just an interesting tidbit. Last year Knoll earned more than 8% of its revenue from sales to federal, state and local government agencies.
When was the last time you saw a government agency reduce its expenditures? (Go on... I'll wait...) This segment of the company's revenue is probably as secure as any source of income could be.
On top of that, Knoll owns approximately 175 U.S. patents on components used in its products. This puts a wide "moat" around the company and insulates it from competition.
As I mentioned earlier, the stock is up about 62% this year on heavy volume. It broke below a key support level at the 50-day moving average (MA) which, as you can see, is moving farther away from the longer-term 200-day MA.
And here's something you don't see very often...
It's called a "bullish engulfing pattern". Look at the white candlestick at the far right of this 1-month chart.
Bullish engulfing pattern is a very potent bullish reversal pattern that occurs when the most recent day’s “body” (which is from that day’s opening price to its closing price) completely engulfs the previous day’s body.
We'll talk price targets is a minute, right after we look at Knoll's strategy of...
I started following this company’s progress on February 3, 2014 when they announced they were acquiring another company I was friends with, Chicago-based HOLLY HUNT, "the premier high design residential showroom resource and provider of furnishings, lighting, textiles and leathers for architects and interior designers".
This move is in line with the company's growth strategy which (according to Knoll's CEO) "focuses on specific international markets where we can significantly build our share, such as Canada, Mexico, Europe, Asia, the Middle East".
Following the acquisition, approximately 40% of Knoll revenues will come from outside the North American office market.
Shares of KNL advanced 39% in the 10 months following the deal.
Since then Knoll has made three other significant deals.
On December 1st, 2016 the company acquired DatesWeiser Furniture Corporation, a Buffalo-based firm marketing conference and meeting room furniture.
In January 2018 they acquired Copenhagen-based Muuto, makers of luxury lighting and furniture. This deal contributed to the record-setting 2018 results we talked about above.
And on August 26th of this year, Knoll acquired Fully, a "pioneer in direct-to-consumer sales of high-quality, high-performance adjustable height desks, ergonomic chairs and accessories."
This is the most undervalued stock in the sector.
The average household goods stock’s PE tend to range between 16 - 20, over the past 12 months.
Knoll’s trailing-twelve-months PE is currently 11.8. So if it simply trades in line with the industry average, then we have a stock that should be trading in the $32.60 - $40.80 range for a gain of 69.4%.
And if we use next year's earnings estimate of $2.30, then a 16 - 20 PE ratio would put the stock even higher, at $36.80 - $46.00.
If we split the difference and assign a price of 18x 2020 earnings, we have a $41.40 stock next year -- a gain of almost 50%.
But I have to tell you that I’m more of a swing trader, myself.
And since I’m a “swing trader”, (with a time horizon of a couple weeks to a couple months), I’ll tell you that I think the stock can gain 15% - 25% over the next 60 days...
Thanks for reading!
Talk to you next week,