How to Benefit From Housing and Rental Demand

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

The housing market has made a surprisingly quick recovery at the same time as rental markets appear to be continuing along a solid path. Investors can play both trends with the right stocks.

Homes and rentals

Blackstone has been in the news for a couple of years for its efforts in the housing market. The company now owns around 20,000 single family homes and it isn't the only institutional player in the space. This appears to have placed a floor under the housing market, allowing prices and demand to bounce higher.

Meanwhile, individual home ownership rates are slumping. This means that more families are renting than was the case before the housing-led 2007 to 2009 recession. Reasons from tight lending standards to changes in the workplace are cited for the shift. Regardless of the reason, more renters is good news for Blackstone and others trying to create an institutional market out of single family homes.

How to join the party

Investors wishing to jump aboard the improvement in the single family home market have clear options. So, too, do investors looking to tap the strength of the rental market. Stepping back, however, investors can get access to both markets with the right companies.

Here are some to look at:

Ethan Allen (NYSE: ETH) and Williams-Sonoma (NYSE: WSM)

Buying a new home usually means making changes before you move in. That would lead to increased sales at hardware stores. However, renters like to live in nice homes, too. Only a renter isn't going to do renovation work on a home they don't own. Thus, stores that sell furniture and home accessories are likely to see more renter traffic. Of course outfitting a new home also brings homeowners to such stores.

Ethan Allen owns 300 stores, that it calls “design centers,” selling furnishings and interior design needs. Part of the company's allure is its ability to help customers with the interior design process. This has been a key differentiating factor as the furniture business has been hard hit by cheap Asian imports.

The company's top and bottom lines took a big hit during the recession, but now appear to be heading in the right direction. The shares are up nicely from their single-digit lows in 2008, but that doesn't mean that there isn't long-term appeal from here as it cashes in on renters and homeowners.

Williams-Sonoma, meanwhile, sells home furnishing, cookware, and “home accents” across its nearly 600 stores, and via the internet and catalogs. It owns the Williams-Sonoma, Pottery Barn, Pottery Barn Kids, PBteen, Rejuvenation, Mark and Graham, and West Elm brands.

Although the company's bottom line took a steep dive during the recession, its top line remained fairly strong. That fact provided a lot of support for the company's shares, which are again reaching all-time highs. Part of the company's strength today stems from its decision to use the the recession to cut costs and prepare for the future.

The company's Pottery Barn brands make up a big chunk of its top line, but with just 600 stores in a fragmented market, it likely has plenty of room to grow. International efforts make growth even more alluring. For aggressive investors seeking a growth story, this could be a good option.

Sherwin-Williams (NYSE: SHW)

Although painting is usually the responsibility of a rental property's owner, that often means drab white paint. Just like new homeowners, however, renters of single family homes will probably want a little more pizazz in their lives. Painting is an easy and cost effective way to do that. And a new coat of paint does wonders for selling a home, too.

Sherwin-Williams is a clear leader in the paint market, targeting professionals. It owns over 4,000 of its namesake stores and the Sherwin-Williams, Dutch Boy, Minwax, and Water Seal brands, among many others. It, too, has international operations and aspirations.

Sales at this paint giant got hurt early on in the housing meltdown, but owning its own retail network allowed the company to avoid too much damage. In fact, the company continued to increase the annual dividend payment right through the recession. With earnings back on track and a solid business, the shares have seen a pretty impressive run. They are most appropriate for momentum investors.

Playing both sides

While there are companies set to benefit from home sales or renters, finding companies that can play both trends offers both more upside and increased downside protection. Home furnishings and paint are two areas that fit the bill.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Sherwin-Williams 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!

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