Interested in Playing The Housing Recovery? Consider These Stocks

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As the economy in the United States continues to recover from the worst recession in decades, it’s becoming clear that the housing market in particular is showing strength. For the first time in quite some time, the American housing market may prove to add to our national gross domestic product rather than be a drag on it.

Recent data points reflect the resuscitation of the U.S. housing market. The widely-followed S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, showed that in February, average home prices increased 8.6% and 9.3% for the 10- and 20-City Composites, respectively. This was backed up by market research firm CoreLogic, which found that home prices rose 10% in February year over year.

Investors interested in capitalizing on the U.S. housing market’s rise from the ashes likely default to the biggest publicly-traded home-builder stocks. However, there’s a different way to profit from the U.S. housing market recovery that investors should think about.

Three sneaky candidates to consider

Leggett & Platt (NYSE: LEG) designs and produces items found in many households across the country. The company is a mid-cap stock, holding a market value of slightly more than $4.5 billion.

Leggett & Platt is a darling among dividend investors, as the company boasts an enviable dividend track record that most stocks would love to have. According to the company, Leggett & Platt has raised its dividend for 41 consecutive years and in 49 out of the last 50 years. And let’s be clear: the company isn’t offering investors token increases just to keep the streak alive. Leggett & Platt has raised its payout by 13% compounded annually over the course of its 41-year streak. Furthermore, its dividends have doubled roughly every five years for the duration of the last four decades.

Watsco (NYSE: WSO) distributes air conditioning, heating, and refrigeration equipment in the United States.

The steady recovery in home prices means homeowners feel better about their household finances, which tends to result in higher confidence, and importantly, greater spending on home improvements. Watsco and its shareholders benefited handsomely from this during the first quarter, in which the company booked an astounding 70% growth in diluted earnings per share. Total net income and net revenue set a record for Watsco, accentuated by an 80-basis point improvement in gross profit margin.

Like Leggett & Platt, Watsco is a mid-cap stock, holding a $3 billion market value. In addition, Wastco has a fantastic history of rewarding its shareholders with dividends: the company has paid dividends for over 35 consecutive years and has consistently paid increasing dividends over the last decade.

Specialty bedding manufacturer Tempur-Pedic International (NYSE: TPX) is more of a speculative play, probably best reserved for especially risk-tolerant investors. Tempur-Pedic has taken investors on a roller-coaster ride, from $86 per share in April of last year to $22 per share in a span of a few months. The stock has since retraced some of its losses, climbing back to its recent level of $45 per share.

The market positively viewed the company’s buyout of bitter rival Sealy in March, and the combined entity’s most recent quarterly results were boosted by the acquisition. Adjusting for the costs of the transaction, Tempur-Pedic reported $0.62 in earnings per share for the first three months of the fiscal year. With Sealy, the company posted 1.5% sales growth; revenue would have fallen nearly 11% year over year without Sealy’s help.

The bottom line

While many investors may think the home-builder stocks are the best way to gain access to the housing recovery, these three stocks might be a great alternative. Operating performance for many home-builders can be volatile, and the home-building stocks don’t often pay dividends.

These stocks have something different to offer, depending on your individual investing goals. Both Leggett & Platt and Watsco maintain long histories of paying dividends to shareholders, while Tempur-Pedic offers the potential for significant capital gains should the housing recovery gain further traction. Each of these three stocks provides an interesting way to play the rebound in the U.S. housing market.

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Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Watsco. The Motley Fool owns shares of Tempur-Pedic International. 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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