How to spot high return investments

Hidden value is one of the key factors we look for when we’re picking high return investments to recommend in our investment advisories, including Wall Street Stock Forecaster, our newsletter that covers the U.S. stock market.

By hidden value, we mean valuable assets that are not getting the attention they deserve from investors. When a company’s assets are wholly or partially hidden, the stock trades for less than it’s really worth, so you get to buy at a bargain price.

Hidden assets come in many forms. For example, companies often carry their real-estate assets on the corporate books at its purchase price, even though its value has multiplied many times over the years.

A company’s brand name is another good example of a hidden asset. Balance sheets often fail to assign any value to brands, even those household names that have built up multitudes of loyal customers over the years.

La-Z-Boy (symbol LZB on New York), one of the high return investments we cover in Wall Street Stock Forecaster, provides an excellent example. (The company’s shares have shot up dramatically over the past 14 months. More on that below.)

La-Z-Boy’s enduring brand name helps it maintain customer loyalty

La-Z-Boy was founded in 1929 by cousins Edward Knabusch and Edwin J. Shoemaker. Their first chair was a porch chair with a reclining mechanism. They then upholstered the chair so it could be used year-round. To name their new chair, the cousins held a contest, and La-Z-Boy was the winning entry. Since then, the brand has built a strong reputation for quality and a loyal customer base.

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Aside from upholstered reclining chairs, the company makes reclining sofas, and imports wooden furniture, such as tables and entertainment centres. It sells its products through both large department stores and its La-Z-Boy Furniture Gallery stores.

Strong brand, cost cuts have helped La-Z-Boy profit in the recovery

Furniture manufacturing is a cyclical industry, weak U.S. housing markets have hurt new furniture demand. That caused sharp declines in La-Z-Boy’s sales and profits.

However, the company’s strong brand and customer loyalty helped sustain it while it made the necessary cuts to deal with the weak economy. La-Z-Boy’s aggressive cost-cutting plan included laying off 25% of its workforce, shifting production to low-cost countries, such as Mexico, and closing unprofitable stores.

Thanks in part to this plan, La-Z-Boy reported earnings of $0.18 a share in its most recent quarter (which ended January 23, 2010). A year earlier, it lost $0.08 a share. (These figures exclude costs related to the restructuring.)

Sales rose 5.7%, to $305.1 million from $288.6 million a year earlier. That’s the first time in more than four years that the company’s sales have increased on a year-over-year basis.

The high return investment’s shares have shot up from $0.53 in March 2009 to around $11.00 today. That’s a gain of 1,975%. We think La-Z-Boy and its strong brand name may have further gains ahead.

For our latest buy/sell/hold advice on La-Z-Boy and dozens of other potential high return investments in the fast-changing U.S. market, you should subscribe to Wall Street Stock Forecaster. Click here to learn how you can get a one month free trial.