Ethan Allen Interiors: What’s In a Symbol?
A new name for a well-known company can be either the kiss of death or a prelude to future success. But is there any way to predict whether a symbol change can have a meaningful effect on a stock’s price?
Of course not. No one can predict such matters. But in my experience, symbol changes may not be that meaningful, especially for those companies with strong businesses and able management.
Consider the fact that Alphabet (NSDQ: GOOGL) was once known as Google Inc. and that when it changed its name, it also split its shares into two different classes – symbols GOOG and GOOGL.
Guess what? Neither the stock nor the company missed a beat. Even more interesting is the fact that I don’t know anyone who “alphabets” their searches. So yes, Google is still the number one search engine and Alphabet is still a money-printing machine.
In other words, until proven otherwise, a stock’s fortunes are mostly tied to the underlying company’s business management, their market presence and the customer’s brand loyalty.
It’s All About the Business and Value
Certainly, the company featured in this article is not Google. But it is worthy of note because of its business niche. I’m referring to mass market upscale home furnishings company Ethan Allen Interiors (NYSE: ETD), a recognized entity with strong market share and able management whose former trading symbol was ETH. Incidentally, the name change came to avoid confusion between Ethan Allen shares and the Ethereum cryptocurrency which trades under the same name.
So, what’s up with Ethan Allen’s business? Let’s look at the macro first. For one, the recent rise in bond yields has led to an increase in mortgage rates. This in turn has put what I expect will be a temporary damper on the housing market and related downstream related businesses such as home furnishings. And for another, the stock market itself has been in a trading range since early summer.
But those two macro issues aside, this furniture retailer seems to be holding up better than expected given its sales growth rates, rising margins and revenues. Meanwhile the stock is a huge value play sporting a nice 4.2% dividend yield with a healthy dividend growth rate of nearly 14% over the past decade, while trading at less than 10 times earnings.
Favorable Long-Term Trends and Strong Management
Aside from the fact that ETD is attractive on a value basis, the stock benefits from favorable long-term trends, both in demographics and in the way the company does business. First, the demographics:
- Rising demand for new homes is unchanged despite rising prices.
- Persistent movement toward home offices.
Consider that there is still a post-COVID population migration, although the character seems to be evolving. While during the height of the pandemic in 2020 it was all about moving out of big cities into the suburbs, some new trends are emerging.
For example, in 2021, because rents have fallen and home sale prices have dropped or stabilized in places like New York City, there is now a two-way population traffic. This increase in mobility should help ETD over time as demand for both housing and furnishings should remain stable at worst, barring a total economic debacle. In addition, supply chain issues should give the company some pricing power.
Yet even as the macro environment is still supportive of ETD’s business, equally important have been the timely long-term changes within the company’s operations, which in turn have increased and improved the company’s competitiveness and adaptability.
Here are some key management moves:
- Heavy investment in technology has improved sales and inventory efficiency.
- Empowerment of interior design teams leading to increasing sales.
- All products are custom made to order reducing inventory expenses.
- In-house logistics management.
- Majority of products (75%) are made in North America reducing supply chain issues
When combined, these external long term trends and strong management moves have placed the company in a very competitive position.
It wouldn’t be fair to profile ETD as a Stock to Watch without a price chart. And this one is encouraging.
First, the stock has held up nicely during the recent correction, a sign of relative strength. Moreover, a close inspection shows that Accumulation Distribution (ADI) and On Balance Volume (OBV) are ticking up. That means money is moving in.
Of course, the stock still has some work to do. For example, a move above its 20, 50, 100 and 200 day moving averages would confirm that the downtrend has been fully reversed. Indeed, what’s essentially apparent here is that value players are moving in slowly.
So, what’s next? It’s probably a pretty good bet that if the stock can clear the $26 area decisively, it may move back to the low or mid 30s. And if you’re looking for a decent intermediate term trade, this is one to keep an eye on, regardless of the stock symbol.
Editor’s Note: If you’re looking for new growth opportunities without incurring undue risk, consider the advice of our colleague Jim Pearce. Perhaps you know Jim from his stewardship of our flagship publication, Personal Finance.
Jim Pearce has devised market-beating methodologies in his new trading service, Personal Finance Pro. Want to take investing to the pro level? Learn more here.