A Caveat for Investors: The Housing Market

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Again, another report is out that has deflated the balloons of those who think the U.S.economy is on some sort of robust upswing. There exists the weekly optimistic hullabaloo touting growth and the better numbers that are sure to come in a host of sectors. The reality is a "reality check" for those unwilling to face what's really going on in the economy.

June's housing starts

The housing report for June came out on Wednesday, July 17, 2013. It wasn't so good despite predictions it would be. June's housing starts dropped 9.9% to an annualized rate of 836,000. This drop is significantly below analysts’ expectations. It shouldn't have been as I alluded to in my earlier blog post "Investors: Who Do You Believe?"

How will the drop in housing starts and other slower or downgraded growth numbers affect corporations you may want to invest in that rely on a robust housing market)?

Flooring

Consider Lumber Liquidators (NYSE: LL). Here’s a company that relies on people remodeling their homes. An increase in housing starts would certainly suit their palette, but a significant number of remodeling projects throughout the country also leaves a pleasant taste in the company’s mouth. Investors should note that Lumber Liquidators' specialty is hardwood flooring, as well as hardwood flooring improvements and accessories. They’re not dependent solely on new housing starts.

Considering U.S.household debt and persistent unemployment, counting on major growth in housing starts each month is a precarious endeavor at best. The road to better living may continue to be through sprucing up an existing abode, not taking on the financial burden of a new home (if you can get a loan in the first place).

Lumber Liquidators' strength is that it has one of the largest inventories of pre-finished and unfinished hardwood floors in its industry. It offers solid and engineered hardwood, and bamboo & cork, and laminate & vinyl flooring, with flooring specialists in each of its 300 stores nationwide.

Dusan Jovanic noted in his Motley Fool blog post (Lumber Liquidators Is Taking Advantage Of The Remodeling Boom) that the company “is one of the beneficiaries of the housing recovery. Its share price rose more than 400% since the mid-2011 lows, along with the company’s improving fundamentals.”

The point to note though is that this isn’t the recovery everyone was expecting considering June’s housing start numbers. Concerning those numbers, a U.S.economist for BNP Paribas, Yelena Shulyatyeva, said on July 17, 2013, “Today’s report was really surprising. We should be more cautious about our optimism.”

However, I believe that Lumber Liquidators has the business model to survive as it taps the remodeling market.

Roofing

Beacon Roofing Supply (NASDAQ: BECN) is a distributor of residential and non-residential roofing materials. The company has yearly sales of approximately $2 billion. For the first half of 2013, Beacon Roofing had record net sales which were up 5% to $930 million in comparison to the prior year’s $885 million.

Again, the disappointing housing starts for June will most likely weigh on the company as well. Entities like  Beacon Roofing Supply rely on sustained growth over multiple months and quarters. However, investors should note that Beacon Roofing's strength is its substantial market reach. It has 229 branches and operates in 38 states and 6 Canadian provinces.

Furthermore, Beacon Roofing Supply offers complementary building products. These include siding, composite decking, specialty lumber, windows, air barrier systems, and waterproofing systems. So, a diversity of products that cater to home renovation projects is somewhat of a safety net for the company.

Home improvement projects

Lowe's (NYSE: LOW) should ride out the housing start fluctuations because of its focus on consumers’ home improvement projects. The retailer markets its brand aggressively with well-stocked stores that cater to DIY projects. It operated 1,755 stores in North America as of May 3, 2013.

The company’s aggressiveness is also apparent with its recent acquisition announcement. It entered into an agreement with Orchard Supply Hardware Stores (OSHWQ) to buy its majority assets. Lowe’s is paying $205 million in cash.

Orchard Supply is a local hardware store operator with all its outlets in California. Therefore, Lowe’s is further tapping the lucrative Golden State market. Investors should see that revenue and profit growth are what they are after on the West Coast, via community hardware and garden stores that concentrate on paint, repair, and the backyard.

My conclusion

Don't let less than stellar performance numbers in any sector surprise you. You're an investor -- read the signs of the times and make informed investing decisions that sidestep unsubstantiated claims that things are much better than they really are. The three above mentioned companies can be part of a healthy portfolio that relies on remodeling...not the new homes market. 

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!


Michael Ugulini has no position in any stocks mentioned. The Motley Fool recommends Lowe's and Lumber Liquidators. The Motley Fool owns shares of Lumber Liquidators. 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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