A Home Renovation Recovery?

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

Blackstone Group has been buying distressed homes from banks. It's also been buying distressed debt from the government. Both are a clear sign that this financial powerhouse thinks there's value to be had in the housing market. If the housing market is on the verge of a solid recovery, than home renovations are also likely to see an uptick -- and there are some companies that will directly benefit.

Pillars of support
There are actually three sources of support for a home renovation “boom.” First, if the home market starts to heat up, it's likely that more people will need to spruce up their homes in preparation for a sale. While this may only be a coat of paint and other surface changes, it can also mean a kitchen or bathroom renovation. Big or small, making a house pretty for a sale means spending.

Second, most people make changes to newly acquired homes. Clearly it's much easier to put in a new rug or sand and refinish a wood floor when there's no furniture and no people living in a home. It is also a great time to make bigger changes, like moving a wall or redoing the bathroom or kitchen. Such changes can delay the move-in date, but the hassle of major, and minor, renovations is completely avoided if you do the work before you move in. Even if a newly acquired home is to rented out, new paint, and sometimes rugs, are the norm.

Third, as satisfied homeowners watch other people selling and fixing their homes, a little bit of envy is likely to set in. This should trigger people to undertake renovations that they have long desired, but haven't taken on for other reasons. True, a continuation of the weak economy would be a limiting factor, but keeping up with the Jones' can be a powerful motivator.

How to benefit from a home renovation boom?

Hardware stores
The two most obvious choices to benefit from renovations are Home Depot (NYSE: HD) and Lowe's (NYSE: LOW), the two dominant hardware stores in the United States. Both companies offer dividend yields a little under 2% and have sound finances. A housing recovery alone will mean increased business for these two giants. A renovation uptick would be icing on the cake.

Home Depot claims to be the largest home improvement retailer in the world (Lowe's lays claim to being the second largest). Founded in 1978, it is a household name with operations in the United States, Puerto Rico, the U.S. Virgin Islands, Guam, Canada, Mexico, and China. It has well over 2,000 stores offering products from wood to light fixtures. It serves both the professional market and the consumer market.

Lowe's is, like Home Depot, a big box hardware store. Founded in 1946, it has over 1,700 stores in the United States, Canada, and Mexico. Although there may be competitors in the locations where this duo has stores, the smaller players often don't have the big-box retailers' vast assortment of products, making these retailers destination store for hardware needs a key way to play a renovation boom from the do-it-yourself types to the pros.

A paint specialist
Sherwin-Williams (NYSE: SHW) is another home improvement specialist that will see a boost in demand from renovations. Founded in 1866, the company manufactures and sells paints under the Sherwin-Williams, Dutch Boy, Minwax, and Water Seal brands, among many others.

The company is largely focused on the professional paint market with over 4,000 company-owned stores. Its products are also distributed through other retailers, extending its reach well beyond its own shops. Note, too, that it recently struck a deal to acquire a leading Mexican paint retailer, further extending its already material international reach.

The shares have had a notable run, however, so investors would be best served keeping this financially strong dividend increaser on their radar screens rather than jumping in right away. Momentum investors might still be interested, however.

Floors
There are few jobs messier than installing wood floors. Still, a new wood floor can make a huge visual difference in a home. This is where fast growing Lumber Liquidators (NYSE: LL) comes in, since it is a specialty retailer of hardwood flooring. It has been able to pick up notable market share in a highly fragmented industry and appears to have plenty of room to grow.

The company was on target to have over 280 stores by the end of 2012, but it also sells its wares over the internet and via telephone. These last two sales methods extend the company's reach into markets where it doesn't yet have a store. They also get locals ready for a store, if and when the time comes. While Lumber Liquidators doesn't pay a dividend, momentum investors might find it of interest.

A small window?
If a housing turnaround is in the cards, as the so-called smart money seems to be betting, than a home renovation boom won't be far behind. Some of the above companies have had decent stock moves, making them less desirable for income investors. However, momentum investors should take a look at this area of the market before the moves of the Blackstones of the world push prices too high.


ReubenGBrewer has no position in any stocks mentioned. The Motley Fool recommends Lowe's Companies, Inc., Lumber Liquidators, Sherwin-Williams, and The Home Depot, Inc.. 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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