Look beyond Lowe's and Home Depot for value
Posted
May 20 2009, 08:11 AM
by
James Dlugosch
Rating:
You wouldn't know it to read the headlines, but the bottom of the housing crisis appears imminent, and that means opportunity for savvy investors.
Let's look at the indicators. On Monday, Lowe's (LOW) reported results that beat expectations. Although profits slid by 22%, the company earned 32 cents per share, besting analyst expectations of 25 cents per share. Shares of LOW went higher on the news.
Home Depot (HD) followed on Tuesday with earnings that also beat expectations. But unlike LOW, shares of HD fell on the news. It seems investors were reacting to worse-than-expected housing start numbers released the same day.
But on closer inspection, the housing start numbers actually showed signs of improvement. Only the multifamily segment was down. Single family housing starts actually improved slightly.
To me, this is a sign the housing sector is starting to turn around. Now, many investors are expecting long beaten-down stocks like LOW and HD to rally in advance of the improvement in this sector.
It's not a bad strategy. But I prefer to turn my attention away from the big box retailers. There are other companies that stand to profit from a housing sector turnaround.
Here are three of my favorite stocks
Plum Creek Timber (PCL)
Demand for lumber is way down from prior levels as a result of the housing crisis, and so are lumber company stocks. Plum Creek Timber (PCL), a real estate investment trust that owns timber acreage, has seen its stock value cut in half due to the negativity surrounding anything labeled “REIT.”
But that's a mistake, as this REIT will do really well when demand for lumber improves. With a dividend yield of more than 5%, investors in the stock will literally get paid to wait for the home sector to rebound. I expect PCL to double in value when the rebound happens.
Temple-Inland (TIN)
Temple-Inland's (TIN) touches the single family home construction market in a number of ways. As such, its fortunes rise and fall with the number of homes being built. The disastrous collapse in new construction did not destroy TIN, but it came close. Shares of TIN fell to $2.34 per share at the market bottom in March. But they have come roaring back on hopes of a recovery in housing and now trade above $12.
Amazingly, that is well below the 52-week high of $20.49. The really big returns have been made in TIN, but there are still nice gains to be had here. I see the stock doubling in value or more over the next year or two. Housing starts have nowhere to go but up, and when they do, TIN will do the same.
Black & Decker (BDK)
I'm not the handiest guy around, but home improvement projects are a necessary evil these days -- the amount of money you can save by doing them yourself is worth the effort. But you need to have the right tools. And for me, that means buying tools that I know are of high quality. The leader in this regard is Black & Decker (BDK).
But consumers haven't been buying much of anything during this recession, and BDK has suffered losing more than half its value in the last year. Fortunately for BDK, more rookies like me will be shopping for tools in the very near future. I really have no choice but to do it myself -- I can't afford not to! Such a fact should support future sales growth for many years beyond the recovery in the housing sector.
So forget about the retailer and buy the company that makes the things being bought. I see BDK doubling in value from here in 1-2 years.
There you have it -- three stocks set to profit from the turnaround in the housing sector. Get two more stock picks here.
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