High-value stock picks and high-yield investments

Furniture stocks The Lovesac Company NASDAQ: LOVE AND Prostitute decor NASDAQ: LOVE are down following fourth quarter reports opening up a buy-the-dip opportunity. Near-term headwinds hamper these stocks, but they are rapidly improving their operating quality and building leverage for a recovery that should begin soon.

Times are uncertain, but the FOMC’s move towards lower rates should occur this year and lead to the recovery of real estate and ancillary markets such as furniture and furnishings. As they have strengthened their balance sheets and built leverage for growth, the rebound in stock prices could be substantial.

Lovesac Company provides value: capital returns to follow

One of the attractive qualities of the furniture industry is the return on capital. Most furniture manufacturers pay a substantial dividend, but not The Lovesac Company. It is still in a growth phase, reinvesting in the business and producing solid results. Fourth quarter results are mixed and the outlook for the first quarter is tepid, but the 15% increase in store count and wider margins are a growth lever that should be noticed.

The company was able to sustain growth in a no-growth environment due to its number of stores; when the industry returns to growth, The Lovesac Company will lead and gain market share. Since it is now profitable and maintains a strong balance sheet, there is nothing to stop it from paying out a dividend once it hits its growth targets.

The lack of dividends impacts the stock’s valuation: LOVE shares trade at about 14 times earnings compared to Hooker Furniture, which trades at 18 times earnings. Hooker Furniture is a high-yield stock with a yield close to 4.5% and increases its yield every year.

Critical details of The Lovesac Company’s fourth quarter results include 5% revenue growth and better-than-expected margin. The company expanded its margin despite an increase in SG&A and reported accelerated profit growth. Net income grew 18% and GAAP earnings 17%, beating the Marketbeat.com consensus despite weak earnings.

Balance sheet details also favor a stock price rebound. The company’s cash flow is positive and has produced nearly double the cash compared to last year. The accumulation of liquidity is also due to a reduction in inventories which has brought the company into a lean operating condition. Other highlights include current and total assets increasing, liabilities decreasing, and net worth increasing 18%.

Hooker Furnishings struggles in fourth quarter; Makes a critical decision

Hooker Furnishings posted an industry-leading decline in Q4, mainly due to market weakness and a decision to cut unprofitable sales. The sales cut was responsible for 660 basis points of the full-year decline, but had the positive impact of improved margin. The company also reduced its stock during the year to accommodate balance sheet improvements that set it up to continue paying dividends. Balance sheet highlights include cash that has more than doubled and liabilities that have declined. Leverage is low, less than 0.5X in cash and 0.1X in stock.

The risk with Hooker is that the dividend payout represents almost 100% of earnings. The company is expected to return to growth this year, but the ratio may decline substantially only in the second half of the fiscal year. However, the company has indicated its intention to pay significant dividends, so a distribution cut is not expected, although large increases should not be expected until the recovery in activity begins.

Price action in HOFT fell about 4% following the news and set a new low, but investors are buying the dip. The price action is supported by increasing volume in an oversold market, suggesting a rebound will begin soon. Assuming support remains at $20, the market could quickly move to $22 before consolidating. If not, a move to lower prices closer to $18 is likely.

Before considering Lovesac, you’ll want to hear this.

MarketBeat tracks daily Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and Lovesac wasn’t on the list.

While Lovesac currently has a “buy” rating among analysts, top analysts believe these five stocks are better buys.

View the five stocks here