A Safer Way to Play Housing
David 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 had an amazing fourth quarter, with Beazer Homes, PulteGroup (NYSE: PHM), Lennar, Toll Brothers (NYSE: TOL), and DR Horton (NYSE: DHI) up 56%, 52%, 40%, 39%, and 35% this quarter, respectively. Many analysts and pundits view this strength as a clue that residential real estate may recover in the year ahead. However, playing the home builders is risky. Many of the companies have little to no earnings, pay out little to no dividends, and are solely exposed to residential real estate. Alternatively, someone looking to gain exposure to a possible resurgence in home building could look toward lumber real estate investment trusts like Plum Creek Timber (NYSE: PCL) and Weyerhaeuser (NYSE: WY).
Plum Creek and Weyerhaeuser grow and harvest trees used for lumber, plywood, wood chips, and pulp and paper. Their stocks have suffered over the last couple of years after the real estate bubble popped. However, any pick up in home building should drive demand for these companies' products, increasing both volumes and prices for the companies, and in turn, this should drive demand for their stocks.
Although Plum Creek and Weyerhaeuser are exposed to any uptick in housing, they are far less risky than the home builders. Both companies earned money in the trailing twelve months, which cannot be said for the all home builders listed above (Beazer and Pulte both lost money). Also, Plum Creek and Weyerhaeuser pay you to wait, yielding 4.5% and 3.2% respectively, significantly more than the home builders (DR Horton and Lennar are the highest yielding stocks at 1.2% and .8% respectively). Lastly, Plum Creek and Weyerhaeuser are exposed to end markets other than housing (pulp and paper, energy production, and international log markets) that will allow them to make money and pay out their dividends even if domestic housing struggles.
In conclusion, if you believe in a firming or resurgence in the US residential real estate market, you should look to Plum Creek and Weyerhaeuser for exposure with mitigated risk. These REITs have mimicked the home builders move (albeit with less magnitude) in the fourth quarter up 5.3% and 18.4% for PCL and WY, respectively, and should continue to move with the home builders.
I do not have positions in any of the companies mentioned in this post.