You Can Bet Your House on This Investment

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

The secret to truly making a fortune in the market is not to try and time your next trade or your next investment. It is all about identifying the next big trend and riding it for years. In between, there is nothing that you really need to do except to sit tight and do nothing. If you do nothing, you will avoid going into silly and impulsive trades.

The next trend

The next big trend is in real estate. This sector, as a whole, is still very scary for most Americans. The subprime crisis is very fresh in the memories of many investors whose properties are still “underwater,” i.e., they owe on the property more than its market price. In other words, this sector is deeply unloved right now. Lately, the Case Shiller benchmark pointed towards a sustainable recovery in property prices. In specific, home prices appreciated in more than one half of the metro areas in the second quarter. This comes in the face of a gradual and consistent decline in prices since the third quarter of 2006.

The signals

There are some worthy signals to look at while considering the idea of a reversal in the real- estate market has already begun. It is written in bold all across the board. One signal is the performance of the Homebuilders ETF. Shares of SPDR S&P 500 Homebuilders have skyrocketed by more than 50% in 2012 alone. Another signal is the home improvement chains such as Lowe's and Home Depot (NYSE: HD), both are currently touching 52-week highs. Home Depot, for example, upped its annual profit guidelines and stated that “It expects fiscal 2012 diluted earnings per share to be up 18% to $2.92 for the year.” This piece of news took the market by surprise because the market was used to stagnant earnings in the past few years. In addition, shares of companies which drive their profits from home renovations are also on the rise. Sherwin Williams (NYSE: SHW) sells paint and coatings to professionals and retail is also brushing its 52 week- highs. The paint giant reported an excellent quarter on October 25. The company reported that diluted net income per common share increased by 31.0% to a record $2.24 per share in the quarter and 34.9% to a record $5.37 per share in nine months. It also reported that net sales increased 8.9% in the quarter. That is one remarkable report!

You should keep in mind that the “real” economy always lags behind the stock market. It is the stock market that serves as a future indicator to where things are heading in the short- term future. In that sense, you can definitely say that the market is expecting a tremendous rebound in home prices.

How to take advantage of this trend

There are various ways that you, the individual investor can benefit from this trend besides the obvious way of actually going out there and purchasing a property for yourself. So let's discuss your options:

  1. The U.S mortgage market: Any recovery in the real-estate market will first pass through the mortgage market. As more and more people shop for mortgages for their new homes, a few banks are positioned to benefit from this uptrend. The major winner will probably be Wells Fargo (NYSE: WFC) which controls a third of U.S mortgage market. When buying Wells Fargo, you are always in good company. This bank is one of Buffett's largest portfolio holdings.
  2. The U.S residential market: There are a few companies that are currently buying, renovating, and renting residential houses all across the U.S. These companies have been taking advantage of the steep decline in prices and have been buying properties all across the U.S in a large scale. One company that comes to mind is Two Harbors (NYSE: TWO) that in this year alone has invested in excess of $150M in residential properties.
  3. Home accessories: Each of the home-improvement companies I mentioned above will stand to benefit once the trend continues. If home prices continue their gradual climb, people will need more paint, more decoration and more cabinets and
    furniture to go along.

The Foolish conclusion

The real estate market is still one big mess. Investors shy away from it and prefer the safety of other more familiar investments. Basically, housing is still an “unloved” sector, and that is absolutely fine with us. It guarantees that the real estate market, with its various segments, will be trading on the cheap as it does today. But because we are always careful not to catch a falling knife, we have been patiently waiting for a rebound signal before we dive in. This signal has finally arrived. Now, almost all indicators point towards an imminent rebound. I recommend you simply hold your nose and buy. It will pay off.


shmulikarpf has no positions in the stocks mentioned above. The Motley Fool owns shares of Wells Fargo & Company. Motley Fool newsletter services recommend The Home Depot, Lowe's Companies, Sherwin-Williams, 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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