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Stuffed stockings

Yola Edwards


TORONTO (GlobeinvestorGOLD) - Looking for stocking stuffers? Upscale multi-concept king of specialty home products, Williams-Sonoma [WSM], found under the flagship name and the brand names of Pottery Barn, Pottery Barn Kids and Hold Everything, might be just what you're looking for.

The company operates in two segments: retail and direct-to-customer with their Internet business becoming an increasingly important retail channel as it made up one-quarter of total sales. Added to the 559 retail stores in 43 states, Canadian shoppers and potential investors can look at the company's wares in stores located across Canada also.

Company officials reported that third-quarter sales grew 14.5 per cent, margins expanded and net income grew by 30 per cent to $37.1-million (all figures U.S.), or 31 cents a share on an overall store sales increase of 4.4 per cent over the year-earlier period. For the full year 2005, company officials expect to earn $1.86 to $1.88 a share. Although on a 25 price-earnings (P/E) basis, the stock isn't cheap, but it may warrant its scarcity premium, as there are few public competitors in the sector.

The stock's technical picture further supports that premise, as it has been advancing in a staircase manner over the past four-years. After its initial 1999-2000 surge the share price consolidated its gains and formed a double bottom base and hasn't looked back since. The price is currently approaching its recent all-time high, but a daily chart (not shown) suggests that it is getting a little overbought, and investors might watch for a pre-Christmas sale before adding it to their shopping cart. A pullback to the 10-day moving average (MA) at about $42 and the 20-week MA at $40.25 should act as support. From there the stock could sprint to about $46.50.


However, the weekly chart indicates that higher highs are on the horizon after that. All of the moving averages are positive and it appears, from an Elliott wave technical perspective, that the share price is in an extended third wave of a five-wave advance. Since the first and fifth waves tend toward equality when there is a third wave extension, it suggests that the final target for the stock would be about $60, but it might take some time to get there, perhaps 1-2 years.

Dare to dream? Then start by looking through all the possibilities offered at Barnes and Noble [BKS] and put them on your books. The company is a cash cow and according to one analyst "even if free cash flow stays static forevermore, the stock would still seem to be trading a bit below fair value."

Although the company's third-quarter earnings were down sharply from a year ago they beat the streets' expectations and company officials have raised their profit outlook for the full year. While the consensus among analysts was for a loss of 2 cents a share, on October 29, the company reported that third-quarter earnings basically broke even with net income of $327,000 (all figures U.S.), and gross margins held steady over the year-earlier period. Sales for the leading bookstore rose 4 per cent to $1.082-billion in the third quarter with the bricks and mortar store sales up 4 per cent, while Internet sales were up 8 per cent. (A common theme to continued grow appears to be Internet sales.) For the fourth quarter company officials expect to earn $1.72-$1.76 a share, including a 3 cent charge related to layoffs.


With flat earnings and the stock currently trading with a 22.50 P/E, it doesn't sound as though it's a buy, but the technical picture confirms a positive outlook. The share price has traced out two bullish patterns. Over a five-year period, a double bottom has emerged, while more recently over a 3-1/2-year period an inverted head-and-shoulders pattern is evident. However, both the daily and weekly charts indicate that the price is overextended and that a pullback to support offered between the 10-day MA at $39.85 and the longer-term pattern's neckline at $37.84 is likely, thus investors might wish to wait for the pre-Christmas sale. As the weekly MA's are positive and trending closely together, a positive crossover appears to be in the offering after the pull back. Coupled with a small flag pattern, the stock could vault to about $51.74 over the next six months, followed by the inverted pattern's target of about $59.50 over the next 12-months. But don't forget about the stock's double bottom target of about $69, which should materialize over the following year.

It appears that Christmas sales may reward patient investors.

Yola Edwards is a contributing writer and technical analyst for Bell Globemedia Interactive, providing options and technical analysis research on a variety of North American equities.

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