Ride the Resurgence of the Housing Market With These Stocks

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

The recovery of the housing market will help companies disproportionately, because some have weathered headwinds better than others. Also, restructuring will play a key role in providing new opportunities. Let us look at the prospects of Home Depot (NYSE: HD), Lowe's (NYSE: LOW), and Fastenal (NASDAQ: FAST).

Learning from the competition

When good conditions help the economy, a mammoth company will surely benefit from it. Home Depot is a mammoth and will benefit from the housing market recovery. Some evidence can be found in the recent dividend increments (an increase of 69.5% in the last four years).

Home Depot has gone through an important restructuring of its business model. In few words, the company has shed peripheral activities and concentrated on more traditional ones. Its professional supply and ancillary retail business have gone out the window. Now, the firm is focused on closing the gap opened by Lowe’s, concerning supply chain and information technology infrastructure.

The restructuring proposed by Home Depot is expected to take the company to a higher ground. Meanwhile, its stock trades at 20 times consensus earnings, slightly below the industry average. While the stock is fairly priced, it still has room to run. Results depend on learning from the competition and avoiding simple mistakes.

Financially, Home Depot is not enjoying the best times because its debt level is high. Nevertheless, yield is higher than the competition at 1.85%, revenue has increased in the last four years, and cash flow has risen during the last two years. Given that the U.S. economic recovery has had a positive impact, and is expected to keep driving revenue up, it is recommended to buy this stock.

Not so fast, but steady growth

Fastenal is a company that has a history of keeping customers and shareholders happy, and sports a stable operating margin. The firm works on a business model focused on local needs by decentralizing operations. Such model has allowed the business to be profitable, maintaining a strong cash flow.

Positive results are the consequence of Fastenal’s initiatives. The introduction of FAST Solutions and Pathway-to-Profit strategy have fueled part of the growth. Additionally, the company has multiplied stores, although intermittently, the pace has reflected management preoccupation for a steady all-around growth. FAST Solutions has deepened switching costs, at the same time, it has helped customers control expenses. Meanwhile, Pathway-to-Profit has improved market share and same-store sales.

On the downside, Fastenal has reported that daily sales growth has declined in the last four quarters. At the same time, operating margins have been put under pressure from rising costs for raw materials and fuel. Additionally, larger competitors are expected to enter the market, forcing the company to compete on price. The impact has already been felt as cash flow has declined over the last four years.

Fastenal remains financially strong, with no debt and rising revenue. The stock is currently trading at a premium to the industry average while offering a conservative dividend yield (1.55%). Nevertheless, for an investor looking for a long-term investment, it is recommended to buy this stock as the U.S. economic recovery will drive this company’s growth.

Past the sweet time

Lowe’s Q1 2013 report left a somewhat ambivalent feeling. While revenue fell 0.5%, net earnings rose 2.5%, and management hopes for a 4% increase in total sales for 2013. Nonetheless, strong competition from Home Depot remains an issue, and the firm did not match shareholders' expectations.

On the bright side, Lowe’s business model remains ahead of the competition, although Home Depot might be copying it. The U.S. economic recovery, especially in the housing market, will ease competition. Additionally, a new client-focused strategy, which provides customers with a closer relationship with specialists, is expected soon. Also, further investment on owned brands should drive profits up.

When looking at fundamentals, Lowe’s is trading with a similar premium (18%), but more conservative earnings and revenue estimates than the competition. Financially, the company is also facing a growing debt issue because cash flow and revenue have stagnated during the last four years.

In all, Lowe’s has performed well in the past, increasing revenue and rewarding shareholders. But today, the situation is different and the sweet spot for buying stock is gone. It is recommended to hold until the end of the summer season to see whether the firm is able to pick up again.

Bottom line

It is recommended to buy Fastenal or Home Depot because business model restructuring will allow them to better seize the opportunities provided by the U.S. economic recovery. Lowe’s is not a bad stock, but its current standing is below the competition. Also, the growing cycle is past its peak and competition has put noticeable pressure by chipping into revenue.

With the American markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!

Damian Illia has no position in any stocks mentioned. The Motley Fool recommends Home Depot and Lowe's. 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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