Homebuilders or Home Improvers?

Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Home builders have been on quite the run over the last year. KB Home (NYSE: KBH) has managed to bring investors over 130% gains, and Hovnanian Enterprises (NYSE: HOV) has returned an incredible 250%+ this year! The gains are not limited to these relatively small companies, though; even Home Depot (NYSE: HD) has pulled in close to 50%, while Lowe’s (NYSE: LOW) has given investors 35% gains thanks to home improvement sales going through the roof. Is there money in housing? Let’s take a look!

The Builders

The two builders mentioned above have seen some incredible movement this year. KB Home started out the year badly, then popped 75% in the spring time, before returning back to 0% gains on the year. Since the summer KB has gone on to fly high above the market, even while losing money. 

Hovnanian followed a similar pattern. Losses, then extortionate gains, losses, and then bigger games. The company also continued to lose money. How can these possibly be considered worthwhile investments?

Well, housing is looking pretty good, and both KB and Hovnanian are looking to post an actual profit within the next two years. I don’t think it is enough to justify the gains just yet, though. A Zillow search in my area shows 34 foreclosures in my ZIP code alone, and why would people be buying new houses when foreclosures are dirt-cheap?

These homebuilders are not the stocks for me, and I wouldn’t recommend them for you either. These stocks are for the person that is willing to take a massive risk. I’m not really into those insane risks when investing for the long term. I think the better option is to invest in the stores that make their money from home improvement.

Home Improvement     

Even if the homebuilders take off and make a whole bunch of money, there will still need to be improvements done to those homes. That’s why I’d elect to keep my money in a company like Home Depot or Lowe’s. Both companies are fundamentally solid, and both companies will be around for a long time to come.

Home Depot is a Dow Jones component that has double-digit income growth and a small dividend that’s payable every quarter. If you believe in the comeback of the housing market then you have to believe that people will be heading to Home Depot to stock up on supplies to renovate.

Home Depot is very diverse in their offerings. Their largest source of income is in the hardware and seasonal supplies section, about 25% of their sales. Plumbing, electrical and kitchen supplies make up another 25%, and the company even manages to derive a decent 10% of sales from overseas.

I think Home Depot is fairly priced right now. It may be a good time to get in for any potential growth you think will come from a housing resurgence.

Lowe’s is very similar in structure to Home Depot. The company derives its value from sales in the plumbing, electrical, and kitchen division, as well as hardware and seasonal. Lowe’s international stores are smaller than Home Depot, but that leaves a lot more room for growth. Lowe’s offers a very similar dividend to Home Depot, so there are no differences to pick at there.

Pick One!

Fine, you forced me into it. I’d have to go with Home Depot. The name is definitely more recognizable. The Home Depot staff is always willing to help people out, and I think that their great service will keep this company atop of the home improvement stores for many years to come.

There are always potential negatives in investing, and I feel Home Depot has its fair share. For instance, there’s a bit of debt on the books that I’m wary of. Surely a company of their size would be able to pay off the debt and work within a massive float. They have the power over suppliers that would be needed to pull off such a task.

I think sales will continue to grow at Home Depot. If the economy takes us into another downward spiral I believe people will still feel the need to fix up their homes, and this company will out live any kind of downturn.

 


Ash1402 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend The Home Depot and Lowe's Companies. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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