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In a January research note, Deutsche Bank economists dubbed 2013 the “Year Of The House,” and their optimistic view on the U.S. housing recovery should have come as no surprise to investors.
If 2013 is the Year of the House, 2012 was the year of the housing stocks, with the S&P 500’s gain paced by builders like PulteGroup and Lennar. The residential construction companies now bear the weight of heavy expectations though, and while early indications are encouraging – Pulte, Lennar and peers like D.R. Horton and Ryland all beat expectations this quarter – there may be other housing-related investments with more room to run.
“If you really think pork is gonna take off, you don’t buy the pig,” says Neil Hennessy, chief investment officer of Hennessy Funds. “You buy the feed” and other peripheral needs for creating the in-demand asset.
In that vein, he’ll leave the high-flying homebuilders to other investors, instead focusing on derivative housing plays like carpet-maker Mohawk Industries, building materials outfit Masco and home furnishings retailer Pier 1 Imports.
All conform to one of Hennessy’s key investing guideposts: a cheap price-to-sales ratio that has him paying less than $1.50 for every dollar of sales. He also believes Mohawk, which does not presently pay a dividend, is easily positioned to initiate a payout to shareholders.
Sandy Villere and George Young, who manage the five-star Villere Balanced Fund, like the look of Leggett & Platt, which produces a range of components and products often found in homes and offices.
Slept on a mattress lately? Odds are it had springs made by Leggett & Platt, the industry leader. More new and existing homes sold, means more folks who need bedding, Young and Villere reason. The stock’s recent charge to record highs may be cause to wait for a pullback, but if the improvements in the market hold up or accelerate earnings should keep up.
Conversations with executives at companies tied to housing turn up similar sentiments.
Fortune Brands Home & Security CEO Chris Klein told Forbes in a recent interview that his company’s business model gets a lift from any continued upswing in new construction, but that a comeback in the core repair and remodel segment that makes up 70% of its business would have an even bigger impact.
The maker of windows, doors and cabinets is seeing a lot of homeowners with cash to spend taking on projects, while younger owners who took on projects funded by home equity lines of credit or other borrowing during the boom years have been largely absent.
Still, Klein is confident that Fortune Brands is poised to withstand any weakening in the housing rebound, and to thrive if it strengthens. “I’m more concerned about servicing a much higher level of demand,” he says, as opposed to a significant downturn.
Whirlpool Chief Executive Jeff Fettig offered a similar take in an interview following the appliance maker’s earnings in late January.
“We’re more optimistic than not that we’ve hit bottom,” he says. “It’s a slow recovery, but everything is moving in the right direction.”
It’s a trend that is being recognized in the retail space too. Home Depot shares had a huge 2012, and rival Lowe’s has been playing catch-up, but the benefits should go beyond the home improvement chains.
Citi retail analyst Deborah Weinswig recently upgraded Macy’s and Target based on a more upbeat outlook for U.S. housing, with increased construction and sales feeding into the home décor sales.
“We expect increases in spending due to the recovery in the housing market, as consumers are poised to have accelerating benefits from both the wealth effect and transaction effect,” Weinswig writes. “Based on increases in home prices, we believe that we will see outsized spend in 2013 on those items for the home.”
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