How To Play An Improvement (Not A Boom) In Housing

Includes: EXP, LEN, LOW, VMC, WSO
by: Insider Monkey

By: Anil Nain

After a housing crash that saw trillions of dollars of wealth eroded, millions of Americans entered loan defaults and lost their homes, Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC), and massive government bailouts, the housing market may have seen a bottom, recent data suggests.

Data released jointly by the U.S. Department of Housing and Urban Development and the Census Bureau indicates that privately-owned housing starts in January were at 890,000, 23% higher than the January 2012 rate of 720,000. Looking ahead, privately-owned housing units authorized by building permits in January were at 925,000, 35.2% above the January 2012 numbers. And, according to ADP's National Employment Report, 21,000 construction jobs were added in the private sector between January and February 2013, which would mark the 8th consecutive month for additions in construction.

Moreover, stabilizing home prices also appear to be moving inventory; for the second consecutive year, distressed sales fell to 24% in 2012, from 32% of all home sales in 2011 according to the National Association of Realtors. Low interest rates and a favorable "buy vs. rent" tradeoff are also frequently cited contributors to an uptick in demand.

So while improvement appears underway and housing is expected to be far less of a drag on economic growth in 2013 than it has been in the last few years, celebration is probably premature. It will likely be a number of years before we reach pre-crisis levels and the near-term outlook remains fragile. With that being said, improving dynamics in construction markets could bode well for a number of companies; we've selected a few in both housing and non-housing end markets.

Vulcan Materials Company (NYSE:VMC): This producer of construction aggregates (crushed stone, sand and gravel) could stand to benefit from increases in private construction demand. Total revenues were $608 million in 2012, basically flat over the previous year. Rock-solid fundamentals combined with a year-end 2012 price to book multiple 20% lower than the industry average of 2.4x positions the company well within its peer group. It's always worth monitoring hedge fund sentiment for the very reasons mentioned here, and Vulcan saw its aggregate interest from the smart money jump by 36%.

Lennar Corporation (NYSE:LEN): The homebuilder that also provides financial services through its Rialto segment, grew total revenue by 33% from 2011 to 2012. Lennar's backlog as of November 2012 included over 4,000 homes representing an increase of 87% over 2011, and a potential revenue increase of over 100% to $1.2 billion compared to numbers one year earlier. Plenty of the hedge funds we track were bullish on Lennar in Q4, including D. E. Shaw, Steven Cohen and Jim Simons (see the full list of funds holding Lennar).

Lowe's Companies (NYSE:LOW): Lowe's is the world's second largest home improvement retailer that stocks over 40,000 products across categories including materials, appliances, paints and lighting. Lowe's' portfolio of brands includes Whirlpool, Stainmaster and Pella among others. While consumer discretionary spending remains under pressure, the company's recent focus on operational efficiency and merchandising-including the recent purchase of ATG stores, an online retailer of home improvement products-positions the company well to capitalize on a rebound in home improvement spending. We've discussed this company's upside quite a bit recently, and it's possible that bulls can grab a "growth at a reasonable price" play at the moment.

Eagle Materials (NYSE:EXP): Eagle manufactures and distributes Cement, Gypsum Wallboard, Recycled Paperboard and Concrete and Aggregates. For their third quarter, which ended December 31st, Eagle reported a 33% jump in revenues over their previous quarter one year earlier, with improved sales across all business lines. Of particular note in the quarter were operating earnings in Gypsum and Wallboard, up $362% over the previous year. Twenty-five of the hedge funds we track held Eagle heading into 2013, and Israel Englander's Millennium subsidiary Catapult Capital was a big name upping its stake.

Watsco (NYSE:WSO): Watsco, meanwhile distributes air conditioning, heating and refrigeration equipment, and related parts and supplies in an estimated $35 billion market. Revenues improved 15% in 2012 to a record $3.4 billion, with strong operating cash flow of $173 million. The company also envisions replacements as a growth area, citing 89 million air conditioning and heating systems in service for more than 10 years. Watsco has paid dividends consistently for the past 35 years, and currently offers a dividend yield near 1.2%. Income-seeking investors also get solid value here, as the stock is trading at an 18% discount to its sales value parity.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article is written by Insider Monkey's writer, Anil Nain, and edited by Jake Mann. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.