In every sector there are the household names, the second-tier businesses and the also-rans. And quite often, there are a small scattering of businesses that are overlooked, attract very little media or analyst attention and generally "fly under the radar".
While some of these are unknown because they are average or poor quality businesses, occasionally, a high-quality stock is hidden among the overlooked few.
Fantastic Holdings Limited (ASX: FAN) may be an example of exactly this kind of stock.
Investing with tailwinds
As an investor, it makes sense to buy businesses that benefit from a secular tailwind. What we mean by a secular tailwind is a trend that is unlikely to change or moderate any time soon.
For example, one secular tailwind in the Australian economy is the aging population, while another is the falling Australian dollar. Both these tailwinds mean that stocks that are exposed to aged care or inbound tourism are more likely to outperform the market in the future.
Housing and construction activity is another economy wide theme that benefits certain stocks. The housing construction and price boom of the last several years can be seen in the growing profits and increasing share prices of stocks like Harvey Norman Holdings Limited (ASX: HVN) over the same time period.
Put simply, new homes often mean new furniture and white goods. A secondary effect of rising house prices is the "wealth effect" where home owners feel comparatively more wealthy as the value of their largest asset rises, and as a result are more willing to spend money, even if they have not bought a new home.
Fantastic Holdings, which owns and operates the Fantastic Furniture range of stores nationwide, is a beneficiary of these twin effects.
The earning power of couches and beds
Fantastic is a vertically integrated business which designs, manufactures and also imports furniture for the Australian market. The company operates several brands including Fantastic Furniture and Plush, which account for the vast majority of profits.
The largest of these brands, Fantastic Furniture, operates at the more value conscious end of the spectrum, retailing high quality, well designed, affordable products.
This positioning in the market was the major driver of the doubling of net profits in the past year. Net profit rose to $13.2 million, which was over 125% better than last year, earned on sales of $496.9 million.
The other really eye-catching element of the results was the cash flow generation of the company, with operating cash flow of over $24 million, which was also more than double the previous year.
For retail stocks, one of the most important metrics to watch is like-for-like or same store sales growth. This measure is a better indicator of business profitability than others as it strips out the revenue and profit growth that comes from new store openings and gives a more reliable indicator of the demand for the products sold by the company.
Fantastic experienced like-for-like sales growth of 12.8%, which put it at the top end of retail stocks on that measurement from this reporting season.
Strength in housing
The continued strength in housing in Australia is a great lead indicator for companies like Fantastic. It is worth remembering that while house prices in Sydney and Melbourne have taken off, the rest of the country has only experienced relatively muted house price growth.
That, coupled with a steadily rising population underpin the continued strength in the housing sector, and those companies who serve it. With rising profits, a high dividend payout ratio and growth potential, Fantastic is a stock well worth adding to your watchlist.
