Real Estate Recovery: 3 Stocks

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

Currently we are clearly going through a housing market recovery. US home builder confidence jumped in November to a six year high and existing home sales increased 2.1% in October, beating expectations and signaling that the sector is gaining traction every month. How could you profit from it? ETFs could be a great way to play a market trend, but here I will offer you three independent ideas. 

Armour Residential REIT (NYSE: ARR) was established in 2008 and mainly invests in fixed rate agency securities that have less than 20 year maturities and hybrid ARMs with longer than 18 months to reset. The company, with a 2013 expected 6x P/E, a top of the line ROE of 14%, and a 16% dividend yield paid monthly. If I had to own a REIT this would be it!

Cemex (NYSE: CX) is the Mexican cement company that gets over 29% of its EBITDA from the US and that has been going through a deleveraging process after an acquisition spree during the real estate boom. CX recently got over $1.1 billion from the sale of 29% of its Latin American division, and now its net debt to EBITDA stands at 5.5x. The company is a leveraged play on the real estate sector and it has huge room to grow, so it’s apparently a rich 8.5x EV/EBITDA valuation (net earnings are still negative) doesn’t take into account the ongoing deleverage that is targeting a 4.5x EBITDA debt ratio for 2014. In addition, the company can capitalize on the rapid growth in cement volumes that is expected for the US (cement growth in the US is expected to be at 13% for next year!). CX is poised to increase sales and ameliorate margins. I own CX bonds and I think it’s going to be the next stock in my portfolio.

Walter Investment Management (NYSE: WAC) is a mortgage servicer, asset manager, and portfolio owner specializing in subprime and non-conforming mortgage assets. The company is a leveraged play on the sector which is currently outperforming its peers. The EPS for 2011 were $1.62 while expected EPS for 2012 are set at around $2.80 and analysts are already expecting 2013 EPS to come in around $5. This sudden change would take the 25x 2011 P/E to a much lower 9x multiple in 2013 and the ROE would move from 8.2% in 2011 to 19% in 2013! WAC, with a Market Capitalization of $1.4 billion, could be an acquisition target given the economics that it could achieve if the recovery scenario consolidates going forward. This is an investment with a strong case if you can bear the risks.

When taking into account companies that are paying down debt and operating in a sector that is starting to grow rapidly, we need to acknowledge that income statements are going to reflect huge changes and multiples can go down (or up) very fast as well. Companies that look expensive can quickly become cheap at the same speed 'cheap' banks started to look 'expensive' in 2009. In rapidly changing scenarios, try to focus on the story of the investment, fundamentals are dynamic!


martinzaldua has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Cemex. 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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