Who Wins in the Housing Comeback?

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

Home construction is coming back. This is one of my most deeply held beliefs. I hold this as truth because I believe that the American economy is coming back in 2013. The only thing holding back construction right now is the still shaky confidence of the American home buying public and how much the idiots in Congress delay the recovery (perhaps a discussion for another time).

So when the economy is back, and people are feeling it, new home purchasing will come back. That means even more recovery because more jobs are created, more supplies are built and real estate gets a bump. All good things that make any sort of recovery self-sustaining. That'll be good for me, you and the markets in general.

But how should you approach investing in home builders? For most people, investing in home building means paying some builder to put up a house and then living in it. People just don't think of the size of some of these companies when they do it. There's a habit of thinking of your developer as some sort of local shop … well, a lot of them aren't. Many home builders are national and well worth looking at with an eye towards investing.

Here are a few you should watch:

Pulte (NYSE: PHM)

Pulte builds homes. The firm is also smart enough to have a subsidiary that provides mortgages as well. No sense not making money off both ends, right? This is the firm I mean when I say that these guys can be bigger than you think, as it has a market cap of $7.87 billion. That's bigger than some truly big players in technology and other sectors. Yet, somehow, people don't seem to think of it as investable. You should. Is doesn't offer a dividend, and I wish it would, but its stock has climbed in the last year from $7.94 to $21.09 in midday trading on Jan 23, 2013 - only a few cents off its 52-week high. The firm has a very high P/E ratio which makes me think some players are bidding it up in anticipation of good times ahead.

KB Homes (NYSE: KBH)

KB Homes is an interesting case. It's certainly starting enough new projects, with new ones just announced in the San Diego and San Antonio regions, but it cut its dividend in the past year and the stock has been up and down. Still, I think it'll do well over the next few years as demand for new homes ramps up. As mentioned, the firm's stock had a bit of a valley in Q2 2012 but since then it's been steadily up. Since it bottomed out in July at $6.53 it's now up to $18.90.  This is also a 52-week high. While it did cut its dividend from 6 cents to 3 cents, it didn't eliminate it entirely. I'm not as high on KB as I am on Pulte, but it's still worth a serious look to see if it works in your portfolio.

Lennar (NYSE: LEN)

An interesting company. Yes, it builds homes, but it also buys them. Lennar had the resources to invest in distressed and foreclosed properties through its Rialto subsidiary during the late unpleasantness. That means when demand returns full-scale, the firm will make money off new and older homes. The firm also plans to begin diversifying into building apartments this year.  Lennar announced earnings on Tuesday and beat EPS estimates by 13 cents per share. It also outperformed total earnings for the quarter by coming in $300 million above expectations at $1.35 billion. The firm's stock pays a 4 cent dividend and has gone from $22.65 a year ago to $42.64. That's a third 52-week high out of three firms examined. There's a lot there to like.

The Ryland Group (NYSE: RYL)

Another home builder that hit a 52-week high this week. Are you detecting a pattern? Ryland provides new homes, financing and insurance services. They're no fools. People want to buy homes and they want them to buy them. Ryland has been on a buying kick recently, having begun to purchase lots around the country in preparation for the coming home buying spree it (like me) sees coming. Again, this is a stock with a small dividend of 3 cents but a lot of upside. A year ago it was at $18.49 and now it's at $40.11. You could do much worse.

For the record, that's four firms with 52-week highs this week.

Heck, you could do worse than any of these stocks. Home building is a cyclical industry. Anyone who's been through the last five years knows that. I know a lot of construction guys who want to see it come around to the good part of the cycle, badly. They're poised to do the work; the builders are ready to sell the homes. You just have to be ready for when it does.

Good luck!

Follow Nate on Twitter: @natewooley

More columns by Nate Wooley:

Nate Wooley has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!

blog comments powered by Disqus