The Buzz

All markets and investing news all the time

Home is where the recovery is

October 4, 2012: 10:12 AM ET

Rising home sales have historically boosted revenue for Home Depot and other housing-related retailers.

This article was published in the October issue of Money magazine.

By Paul R. La Monica

Stop me if you've heard this one before: The housing market has finally hit bottom. After years of false hope, that may seem hard to believe. But home sales are indeed rebounding. And prices nationwide climbed 2.5% in June.

Be careful, though, about how you invest in this nascent recovery. Homebuilder stocks have been surging for months in anticipation of a rebound. Shares of Lennar and KB Home have soared around 60% in 2012, while PulteGroup has more than doubled.

"Things are looking up in housing," says Harry Clark, CEO of Clark Capital Management Group, "but you can't buy the builders now."

Related: Housing recovery is finally here

As for real estate investment trusts, many are getting frothy for an altogether different reason. As yield-starved investors have flocked to them to boost income in an era of low rates, REITs have returned twice what the S&P 500 has over the past three years.

Follow the shoppers

Fortunately, you have cheaper options. Rising home sales have historically boosted revenue for housing-related retailers such as Home Depot (HD). The home-improvement chain, shares of which Clark's firm owns, says sales will jump 4.6% this year, after having fallen 1% over the prior three.

While HD shares are up 35% this year, they trade at a price/earnings ratio, based on projected profits, 20% below that of the homebuilders -- even though the stock has historically traded at a premium.

Tim Holland, a portfolio manager for the ASTON/TAMRO funds, which owns the stock, thinks HD has more room to run as the market slowly recovers.

Shares of home-goods sellers Williams-Sonoma (WSM) and Bed Bath & Beyond (BBBY) have also lagged the builder rally, though they enjoy much better growth.

Prefer to go with a fund? S&P Homebuilders ETF (XHB) owns all three stocks. Despite its name, this ETF holds 70% of its assets in shares of home-appliance,  -furnishings, and -improvement chains and building-material makers.

 Think outside the big box

Another option: lenders in healthy states that aren't suffering through the aftermath of a major housing bubble, Holland says. These banks will benefit as purchases and refinancings climb. He owns Little Rock's Bank of the Ozarks (OZRK). At 7.3%, Arkansas' unemployment is below the U.S. average. The bank is also pushing into Texas, with a booming energy sector.

As for an indirect play, there's Berkshire Hathaway (BRKB). Though not a pure housing stock, Warren Buffett's company owns several related businesses, such as the flooring company Shaw Industries and the paintmaker Benjamin Moore, notes David Rolfe, manager of the RiverPark/Wedgewood Fund, which owns the stock. Berkshire also has stakes in leading mortgage originators Wells Fargo and Bank of America.

Join the Conversation
Fear & Greed
Sponsored by

To view my watchlist

Not a member yet?

Sign up now for a free account
Stupid Stock Move of the Day
#StupidStock Move of the Day! Ford's July sales better than expected & better than $GM. $F down more than 1% today? Just because market is?
Powered by WordPress.com VIP.