A Housing Turnaround

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

Dow-30 component Home Depot (NYSE: HD) recently announced pretty good earnings, largely attributed to a recovering housing market (Read more about my take on Home Depot). Indeed, as people buy homes they almost invariably make changes to the property to suit their needs and desires. After years of being a drag on the company's results, it is a welcome sign that there is a shift taking place in the still-depressed housing market.

In fact, that industry has been so downtrodden that vultures have swept in, including a highly publicized move by Blackstone Group. The reasoning for investors, from the mom and pops to the giant asset managers, to jump into the housing market is pretty easy to understand. So many homes are in foreclosure or are sitting, idle, on bank balance sheets, that home prices have remained depressed for an extended period of time.

Buying a home, or a few thousand homes, now and renting them out would provide a double benefit. One, you would likely get a good price on a property that you expect to appreciate in value over time and, two, you get rent from a tenant while you wait for the expected housing turn around. This is a pretty good deal if you have the capital to take advantage of the situation. 

Many investors see the opportunity, but lack the capital. However, with names like Blackstone in the market, maybe capital isn't as big a concern as it once was. In fact, Jonathan Gray, global head of real estate for Blackstone, recently noted in a Bloomberg interview that he thinks that there is just a two year window for investors to get into this market. This is particularly notable since companies like Blackstone can walk in and buy multiple homes in one transaction, quickly clearing unwanted homes off of bank balance sheets in efficient transactions.

Although another two years seems like a long time, it would be a welcome relief to a tortured industry if that prognostication proved correct. Meanwhile, home prices wouldn't be the only thing to benefit. Home Depot is just one example of a company that would see results improve. Here are a few more:

Lowe's (NYSE: LOW)
Lowe's is, like Home Depot, a large home improvement store. Founded in 1946, it has over 1,700 stores in the United States, Canada, and Mexico. The company's giant box stores sell everything from pipes to nuts to light bulbs. While some think the company, in conjunction with Home Depot, destroyed mom and pop hardware stores, far more people are loyal customers because of the convenience and cost saving offered.

With a 2% yield, just about in-line with Home Depot's yield, Lowe's is probably not the ideal candidate for an income investor. However, for more growth-minded investors, the company is financially strong and reasonably well positioned. Still, it might make more sense to stick with Home Depot, which has a stronger operating history, since the two are so similar.

Lumber Liquidators (NYSE: LL)
Lumber Liquidators' shares have been on an upward climb for years. It's hard to believe, in fact, based on the moribund property market, that this retailer of hardwood flooring would be doing so well. However, with a highly fragmented industry, Lumber Liquidators appears to have plenty of room to grow. The company is hoping to have over 280 stores by the end of 2012, with more growth to come in the years ahead. It also allows customers to purchase products over the internet and via telephone, which extends its reach into markets where it doesn't yet have a store. If the home market heats up, it is likely that this company will see even more demand for its flooring products. While Lumber Liquidators doesn't pay a dividend, momentum investors might find it of interest.

<img src="http://media.ycharts.com/charts/bc3e843fb304f65a9a2ab4bc79e60735.png" />

LL data by YCharts

Ethan Allen (NYSE: ETH)
Ethan Allen has a network of approximately 300 “design centers” that sell furnishings and help customers with interior designing needs. While the furniture business has been hard hit by cheap Asian imports, Ethan Allen still retains its allure as a high-end brand. While trading down is an issue, if the housing market improves, it is likely that home owners will also be trading back up to better furnishings on the heels of an improving economy. In fact, like Home Depot, Ethan Allen also recently reported strong quarterly earnings that were largely attributed to an improving housing market. Note, too, that the company's operations extend well beyond U.S. borders, even though it makes the bulk of its money domestically. Thus, there is some international appeal here. That said, the dividend is lower than Home Depot's, so this is more of a turnaround story than anything else.

Williams-Sonoma (NYSE: WSM)
With brands like Williams-Sonoma, Pottery Barn, Pottery Barn Kids, PBteen, Rejuvenation, Mark and Graham, and West Elm, Williams-Sonoma has a good position in the home furnishings market. It sells products through its nearly 600 stores and via the internet and catalogs. Its products, however, go well beyond furnishings to include cookware and home accents. Moreover, it too has an upscale image that it has been able to maintain despite the economic downturn and its own restructuring efforts. Its restructuring moves, meanwhile, should position it well for the eventual housing turnaround. Indeed, with a leaner cost structure, more money will flow through to the bottom line, helping to support a modest dividend and continued expansion into new markets.


<img height="90" src="/media/images/user_14110/signiture_large.jpg" width="228" />

ReubenGBrewer has no positions in the stocks mentioned above. The Motley Fool owns shares of Lumber Liquidators. Motley Fool newsletter services recommend The Home Depot, Lumber Liquidators, Lowe's Companies, and Williams-Sonoma. 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