5 Ways to Benefit from the Real Estate Recovery
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It's official, the real estate sector is on the recovery path. It has taken too long, and the recovery may not be as strong as we would like, but the signs are too evident to be ignored. The worst is over for the real estate sector, and there is a lot of upside room in the following years. Even in a slow and unexciting recovery, long term investors may be facing a historical buying opportunity
The following charts from The Wall Street Journal show the evolution of different real estate indicators, and they are all pointing towards improving conditions. Prices, sales and housing starts are recovering, and the real estate sector has even become a positive factor for economic growth.
This excellent graph from Calculated Risk shows housing starts from a historical perspective, including the recently published June data. The recovery is still incipient, and that could mean some fragility, but it also means that prices have a lot of upside room. I would say the timing to invest in real estate stocks looks quite convenient; the recovery is on its tracks, but still on its initial stages.
For a diversified play on the housing sector, ETFs may be the way to go, and SPDR S&P Homebuilders (NYSEMKT: XHB) is an efficient instrument to bet on improving housing numbers over the following years. It has a portfolio comprised of companies related to the housing sector; homebuilders are almost 30% of assets, but it also includes corporations involved in building products, home furnishings, home-improvement retail, home-furnishing retail, and household-appliance makers. Companies like Home Depot and Pier 1 Imports are part of the holdings of this ETF.
Another sector ETF to capitalize a real estate recovery is iShares Dow Jones US Home Construction (NYSEMKT: ITB), which owns many of the same homebuilders, but doesn´t have so much exposure to companies in furnishing or other businesses related to real estate. Homebuilders make up almost 70% of the portfolio of this ETF, so this instrument is much more leveraged to construction. From this perspective, ITB would be the right choice in a strong recovery for new buildings, while XHB looks like a better idea if existing home sales are going to be the strongest beneficiaries form the recovery.
Among individual homebuilders, Lennar (NYSE: LEN) is a very strong position to capitalize the recovery. The company has reduced its financial leverage and streamlined inventories over the last years, which puts it in an advantaged situation. Lennar was one of the first homebuilders to turn profitable, while most of its competitors are still trying to turn a decent profit. Being better capitalized than other companies, Lennar has the financial resources to expand rapidly in a bullish housing scenario.
The upper income segment looks like a smart place to be in the first stages of a recovery. These kinds of customers are less affected by unemployment and other economic problems, and they are more likely to prefer new houses over existing ones. Toll Brothers (NYSE: TOL) is focused on this socioeconomic segment, and the company has also reduced its debt levels and regained financial strength. Being one of the best managed homebuilders and with a focus on the very attractive high income segment, Toll is on its way to better times if real estate continues recovering.
Caterpillar (NYSE: CAT) is the biggest heavy equipment manufacturer in the world, and it has an especially dominant position in the US. In spite of lackluster construction spending over the last years, the company has done really well thanks to its international business and strong demand from commodity producers.
Caterpillar is in fact reporting record earnings per share levels, but investors seem worried about the possible implications of an economic slowdown on the company's sales. For this reason Caterpillar is trading at a really attractive forward P/E of 7.5. A real estate recovery may be just what investors need to leave their fears behind and buy shares of this undervalued powerhouse.
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