The truth behind the drop in Williams-Sonoma stock

The market is usually ahead when it comes to a stock’s price action. In case of Williams-Sonoma New York Stock Exchange: WSM, a recent 6.6% sell-off in the stock has many investors wondering if there’s anything to worry about. It turns out there may be some suggestions to raise eyebrows, but not enough to lose faith in the long-term value of this company.

For reasons that will become clear to you in a minute, what is affecting the stock price today may just be a small speed bump on the way to an otherwise spectacular performance. After all, there has to be a reason this stock has outperformed the broader S&P 500 by as much as 32.8% over the past twelve months.

In the world of consumer discretionary stocks, Williams-Sonoma benefits from the same tailwinds that hit other high-growth stocks like SoFi Technologies NASDAQ: SOFI, which just jumped 20% thanks to explosive gains. What these two have in common is their exposure to real estate, which you can gauge by following the Vanguard Real Estate ETF NYSEARCA: VNQ.

Buy the rumors, sell the news

Considering there is a rapidly escalating conflict on the Red Sea, in which the US and some of its allies are involved to stop further attacks on shipping, oil has recently become the thing to watch.

Not only does rising oil prices pose a potential threat to Williams-Sonoma, but so does the disruption of shipping routes the company must take, which directly cuts into margins. Of course, to orient markets with a reality check, the company’s CEO articulated the risks that rerouted shipments could have on future inventory levels – and profitability.

This is the news, and the markets have had up to a week to digest what rising fuel and shipping costs will reflect on the company’s future financials, so you can probably imagine that the 6.6% sell-off in the last days demonstrates the market’s conclusion regarding a fair price after the news announcement.

The saying “sell the news” remains true here, but what about the other side? The one that invites you to “buy the rumors”? Well, word is that the real estate market is about to have a huge upward swing coming from construction stocks, even Warren Buffett is invested in it, and that guy is almost never wrong.

Analysts at The Goldman Sachs Group NYSE:GS have stated that they expect a turning point in the manufacturing sector of the US economy, which would be triggered by interest rate cuts proposed by the FED itself.

This would apply to the construction sector, as lower financing costs can make things easier for names like this DR Horton NYSE: DHI to rake in profits, hence Buffett’s purchase. Even more interesting is how Williams-Sonoma outperformed the SPDR fund for selected consumer discretionary sectors NYSEARCA: XLY by as much as 35.6% in the last twelve months.

After such a bullish ride, do you really think the markets have no reason to keep the stock where it is, other than to go even higher? But wait, there’s a missing piece to the puzzle. Residential equity NYSE: EQR underperformed the rest of the REITs by 10.0% last quarter; Why?

Waterfall effect

If you think about the real estate value chain, who gets paid first when a new home comes on the market? Typically, home builders, of course, but Buffett is already a crowd, so what’s next? The new owner will have to furnish the house as soon as it is sold. Williams-Sonoma is synonymous with the new home experience.

Once the real estate market starts to flow like this, REITs (real estate investment trusts) like Equity Residential start to see the benefits. Because of this, you won’t see the same performance in REITs as soon as you see it in stocks like Williams-Sonoma.

Before you get lost in the weeds of the market mechanisms, remember that you are thinking of buying an item. So word is that real estate will see pop-in activity, and knowing what you know now, it becomes clear that Williams-Sonoma is right on the cusp of a new bull rally.

However, rising fuel and shipping costs pose a significant threat to the business and you shouldn’t ignore it. While you can rest assured that despite its near-peak prices today, Williams-Sonoma stock is still a long-term bargain.

With an ROIC (return on invested capital) of 28.0% on average over the past five years, this stock could continue to add to your wealth, as the share price action tends to match, on an annual basis, the ROIC averages long-term.

Additionally, its P/E ratio of 13.9x offers a 22.7% discount to the S&P 500’s 18.0x multiple. Knowing what you know now, do you think all the bad news is a given with this recent drop?

Before you consider Williams-Sonoma, you’ll want to hear this.

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

While Williams-Sonoma currently has a “Reduce” rating among analysts, top-rated analysts believe these five stocks are better buys.

View the five stocks here