by James Brumley | October 22, 2012 8:59 am
The stock market may be less than compelling in the shadow of lackluster third-quarter earnings. But there’s no doubt about the housing market’s strength: Low interest rates are spurring home demand and keeping homebuilders busy. That’s how builders like Lennar (NYSE:LEN), KB Home (NYSE:KBH) and Hovnanian Enterprises (NYSE:HOV) have managed to turn things around from miserable in 2009 to profitable in 2012. That’s also why shares of those homebuilders are up 187%, 201% and 330%, respectively, since April of last year.
No wonder investors have been in love with these stocks over the past year and a half.
However, homebuilding isn’t the only way to tap into the housing market’s recovery. Indeed, with most of their stocks up by triple-digits over the past few months, the overbought homebuilder arena may well be the worst way to jump in now. Instead, investors may want to tap into three parallel trends that haven’t been as well-noticed yet.
While some construction companies own all the equipment they might ever need (like cement mixers, backhoes or welding equipment), a lot of them simply rent tools or equipment as it’s needed. It’s simply more cost-effective.
For better or worse, this segment has lots of publicly traded names. Hertz Global Holdings (NYSE:HTZ) is one of them, even though Hertz is still predominantly a car-rental name, so it isn’t a pure play on the housing market’s rebound. That leaves United Rentals (NYSE:URI), which not only happens to be a pure play but is also the biggest name in the equipment-rental industry with a 10% market share.
Proof of the pudding: United Rentals saw a 71% improvement in last quarter’s revenue, and per-share operating income ramped up from 90 cents a year ago to $1.35 this time around. The improvement in Q3 is just a microcosm of the improvements that have been made since 2010’s lull.
On the surface, cabinetry and bathroom fixture manufacturers may seem like they’re in the same boat with homebuilders, and therefore too obvious to offer any real surprise value to investors. But the market hasn’t yet fully tied the likes of Fortune Brands Home & Security (NYSE:FBHS) and Masco (NYSE:MAS) to homebuilders, so these two names remain interesting prospects.
Then again, cabinetry and bathroom fixtures aren’t necessarily reliant on the construction market’s health to grow — it just helps. Both companies also benefit from remodeling work, which has actually been a booming business in the shadow of the 2007-2008 real estate meltdown and subsequent freezing of the housing market.
That makes it a win/win situation.
Neither company is in the black right now, but both are expected to swing to a profit next year. Between the two, however, Fortune Brands may be the safest way to play because it also sells home security goods … another briskly growing business.
While the wild profits and easy-money days the mortgage-making industry enjoyed up until 2006 aren’t likely to be seen for decades, the industry is growing again in the wake of more real estate activity. Wells Fargo (NYSE:WFC) and U.S. Bancorp (NYSE:USB) are just two banking names that have affirmed that growth, more than once. And more of that is in the cards.
Most banks are decent ways to play the reblooming mortgage market, and the smaller the better, it seems. For investors shooting for a more direct investment in the housing market’s recovery, a mortgage company may be a better fit. Louis Navellier’s Portfolio Grader identified two of the better ones last week, and Washington Federal (NASDAQ:WAFD) looks particularly compelling.
Investors can take another, more indirect route into the growing mortgage industry … a route very few have considered yet. What about a mortgage insurer?
As was the case with rental companies, private mortgage insurers are few and far between. In fact, MGIC Investment (NYSE:MTG) and Radian Group (NYSE:RDN) are pretty much it now that PMI Group (PINK:PPMIQ) is out of the picture. Then again, MGIC Investment may be all the choice one needs. Oh, it hasn’t been profitable for eight straight quarters, and no net income is foreseen through next year, at least. But all things being relative, it has more upside than downside now.
Sometimes the obvious stock pick isn’t the most productive one. By finding something a little off the beaten path, investors can often avoid an overcrowded trade and find an underestimated (and undervalued) one instead.
As of this writing, James Brumley didn’t own any security mentioned here.
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