The Best Plays to Capitalize on an Improved Housing Market

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

The housing market is by no means the strength of the U.S. economy. In fact, it has been the weakest link in the economy. However, in the last few months we have seen some movement in housing prices, along with consumers showing an interest to buy new homes. Most are beginning to believe that this is a sign that the housing collapse has reached its low, and that now the industry could provide upside. Therefore, I am looking at a few ways that investors might want to play the housing push, and the new found level of optimism.

Lumber Liquidators (NYSE: LL) Not the Popular Choice But the Best

When investors think of the best play on the rebound of real estate, they immediately think Home Depot ). However, Home Depot is growing by less than 5% year-over-year and has lost more than $8 billion in annual sales since 2008. The company has seen decent sales growth and consistent margin improvements, however its one-year return of 63% far exceeds its growth. Overall the company might not be overvalued, but is definitely fairly valued with minimum upside until the top line begins to expand.

While Home Depot has attracted investors by cutting costs and improving its bottom line, Lumber Liquidators is growing its top-line by nearly 20% and has doubled its bottom line performance despite significant expansion. Some have suggested that Lumber Liquidators is overvalued, however if the housing market is making a comeback then this company is perfectly positioned to reap the benefits.

Not only is the company expanding, but comparable store net sales are rising by double digits, and the company has raised its guidance. The company announced earnings last week, created new all-time highs at $58.80 and then fell throughout the week to $53.17. As a result, I believe the stock is presenting a great opportunity and is yet to show any signs of slowing down.

Go After the Technology Involved in the Housing Market

There’s no denying the fact that investors love technology. We love innovative companies that save us money and make life more enjoyable. Earlier this month Workday began trading with a dot-com like valuation, a price/sales of 40! In the housing technology market there are fast-growing, profitable companies, with attractive valuations and big upside potential.

Ellie Mae (NYSE: ELLI) is a provider of on-demand automation solutions for the mortgage industry, and provides data and has detailed insight into the business. This is a company that some might believe is overvalued, with a price/sales of 8.10. However, it has the same catalysts that gave Workday a price/sales of 40, with more than 100% revenue growt, and strong bottom line growth trading at 31 times next year’s earnings.

Elli Mae has traded with a near 60% gain in 2012, but if you believe in the re-birth of the housing industry then this is a stock that could trade higher. The consensus for next year’s growth is just 7%, which provides favorable expectations in an industry that could see a boost in 2013.

My next, and last, housing play is a provider of residential and mortgage loan servicing and asset management services, a somewhat diversified play, Ocwen Financial Corporation ). This is a company that is growing through acquisitions, and is positioned for explosive growth in 2013.

In 2012, the stock has rallied nearly 200%, led in part by a very active month in October. The company acquired Homeward Residential Holdings for $750 million, and last week the company won the ResCap auction with a $3 billion bid. Therefore, the company is now trading at less than 10 times next year’s earnings and is positioned for massive growth, in addition to its 100% earnings growth over the last year. The only problem is the company’s debt load compared to its assets, meaning the company’s bets must pay off. If the industry does grow this is a stock poised to outperform the market.

Conclusion

The goal of investing is to buy low and sell high. With housing companies you are buying near the low because of the weakness in the industry over the last few years. Each of these companies has been successful at growing in a challenging market, therefore just imagine what each might do in a growing industry. As a result, I like all as a play over the next year as the market recovers. 


BrianNichols owns shares of LL. The Motley Fool owns shares of Lumber Liquidators. Motley Fool newsletter services recommend Ellie Mae, The Home Depot, Lumber Liquidators, and Ocwen Financial. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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