Stocks to Play the Housing Recovery
Lee is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There are signs that the US housing market is making a slow but steady recovery, and if it continues the sector will be attractive in an uncertain global economy. Investors need to be careful to avoid exposure to the Chinese housing market and continued weakness in Europe; however, there are plenty of US centric opportunities out there. In this article, I want to give a few reasons why I think US housing is coming back and suggest a few names for further research.
Evidence that US Housing is coming back?
I’m not going to go into the theoretical argument in this article, sufficed to show some data which I think supports the case. All the data is sourced from the US Census Bureau.
First, Housing appears to be coming back.
Second, the data suggests that the supply of new single family houses is starting to get to low levels. Incidentally, the dotted line is the average for the period in question.
Note how it starts snaking up in 2006 as the bubble starts to burst. Interestingly, we are getting back to pre bubble rates. I appreciate that this data doesn’t capture the shadow inventory of foreclosed homes, but the effect of this inventory will be felt on prices. And the latter appears to be recovering.
I’m going to stick my neck out and say that the recent dip in pricing is probably a consequence of the pull-forward effect of the unusually warm winter in the US. In other words, people may have gone house hunting a bit earlier. Moreover, while prices have risen before in the last three years, they weren’t accompanied by the kind of positive trending data we see in the previous two charts. Perhaps it really is different this time?
Stocks to Play a Housing Recovery
The house building stocks go without saying as an option, but I thought it would be interesting to look at some of the more derivative type names. Again, investors need to be discerning here and try to focus on US centric plays.
I’m a bit of a fan of Home Depot (NYSE: HD). It has seen profits and margins rising even though its management refuses to attribute any of this to a housing market recovery. I think we need to take them at their word, which means that there should be upside potential here. Unfortunately, analysts do not always do that and they love the ‘join the dots’ mentality, which means the unusually warm winter encouraged a bit too much optimism earlier in the year. I have a detailed article on the subject linked here. No matter, the stock remains cheap on a cash flow basis and the dividend is useful too. Naturally, another option is its rival Lowes.
If you like the theme of buying into the home improvement retailers, then why not look at what is being sold in them? Stanley Black & Decker (NYSE: SWK) is a company I intend to look at very closely in future. It has a very large market share in hand and power tools for the DIY market in the US. Unfortunately, it has had to lower estimates recently due to currency headwinds, and it does have international exposure. However, any company in a favorable sector that is telling you that it expects to generate $1.2 billion in free cash flow (10% of its market cap) is worth a look!
Other stocks related to the home improvement retail sector are Fastenal (NASDAQ: FAST) and Pier 1 Imports (NYSE: PIR). I’ve detailed both of these stocks at length so potential investors might find the following useful. Here is an article on Fastenal and an article on Pier 1.
For different reasons, I’m a bit concerned about both, but they may attract others. Fastenal has exposure to the industrial sector too, and it never appears to be a cheap stock, although its growth rates have been exceptional. As for Pier 1, this is a truly fantastic turn around story but I wonder how much longer it can go on. In addition, its internet strategy may well end up cannibalizing its own stores. But hey, I wrote that at the time of the original article. It then soared. So what do I know?
Another stock I like is Wells Fargo (NYSE: WFC). It may not appear to be the most obvious choice, but this bank has been aggressively moving (organically and by acquisition) into the US mortgage market and I think therefore is a good play on housing. In addition to balanced portfolios it offers a good way to get exposure to the financial services industry while avoiding some of those firms whose interests are not necessarily aligned with shareholders. I only invest in companies that represent my interests, not those trying to game me in order to line their own staff's pockets. We own the company, not them. Here endeth the sermon!
Other options in the sector include something like timberland owner Weyerhauser or its rival Plum Creek Timber Co, although the timber companies are also exposed to other cyclical industries such as paper and packaging. Investors with a bit more stomach for risk may also like the look of Masco or Whirlpool, although the latter has extensive international operations.
The Right Time To Get In?
As the data in the charts above indicates, the housing industry has the turning radius of an oil tanker on ice. Note that the housing recession started in 2006, and it took a year or so before it significantly affected the wider economy and two years before it really hit home. These things take time to play out, and all the while you will have people willing to take the other side of the trade. This is the good news, because it should keep good value opportunities available. If you think that the housing recovery is tangible then many of these stocks look like good value, in my humble opinion, and it is not too late to get in.
SaintGermain has positions in Home Depot and Wells Fargo. The Motley Fool owns shares of Wells Fargo & Company and has the following options: short OCT 2012 $33.00 puts on Wells Fargo & Company and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend The Home Depot and Wells Fargo & Company. 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.If you have questions about this post or the Fool’s blog network, click here for information.