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The U.S. Economy picked up in the first quarter of the year recording a 2.5% increase versus a dismal 0.4% for Q4 of last year. With uncertainty remaining a constant factor, many projections forecast continued volatility in GDP in the coming months. I remain bullish on equities, especially those that will continue to benefit from the housing recovery. The Dow has out performed the S&P 500, Russell 2000, and Nasdaq YTD. This tells me that investors are seeking quality to cope with low interest rates and global economic uncertainty.

Despite the recent hike in payroll taxes, consumers continued to spend, though at a rate that outpaced savings. While I do believe the consumer, as a result of low interest rates and modest economic growth, will continue to spend, I do not believe that the trend of spending outpacing savings is sustainable.

Housing continues to prop up economic growth. I expect the market to pull back from its recent high and recommend adding more to positions like Home Depot (HD) and D.R. Horton (DHI). These are two stocks I recommended in an article last November. Since that time, Home Depot has managed to gain 19% and D.R. Horton has put on 38%.
Home Depot reported a Q4 2012 earnings increase of 21.5% in February. Sales had increased by 13.9% year over year. One consideration of the Q4 2012 results was the additional week versus that of Q4 of 2011. Excluding the extra week of sales in Q4 of 2012, sales grew by 6.3%. Home Depot also announced that it would increase its dividend by 34% in addition to a $17 billion share repurchase program expiring at the end of 2015. In Q4 of last year the firm projected 2013 sales growth of 2%, share repurchases of approximately 4.5 billion, and diluted EPS growth of 12%. It reports Q1 2013 earnings on May 21st.

D.R. Horton just reported Q2 2013 earnings last week. The company reported a net sales orders increase of 34% in homes, sales order backlog increase of 54% in homes, and a net income increase of 173% to 0.32 per diluted share. The value of the company's backlog increased by 76% to 2.4 billion versus 1.4 billion a year ago. The firm stated in its most recent earnings announcement that with the expansion in its operating metrics, it has already surpassed its pre-tax profits for the entire fiscal 2012 year.

Pier 1 (PIR) is trading above its 100-day moving average and within 4% of its 52-week high. The company recently reported EPS of 0.60/share meeting expectations. The company is not heavily leveraged, and has an operating margin, net margin, and ROE above the industry average. At a PEG of 1.22 it appears to be fairly valued and positioned well for the continuing recovery of the housing market.

Whirlpool (WHR) is trading within 7% of its 52-week high. The firm reported Q1 2013 earnings last week. The company reported an increase of $1.95 in diluted EPS while sales remained constant on a yoy basis with the exclusion of currency effects. Operating profit rose 44% domestically and 8% in Latin America. The continued slowdown in Asia and Europe had an impact on the firm's sales in those regions. It is trading above its 100 day moving average. At its current price, it has a PE of 16.57 and PEG of 0.59%. The firm has less leverage than the industry average and ROE above the industry average. The company's sales declined 2.3% due to a decline in appliance volume. The firm has battled competitors to retain market share and has refused to resort to their tactics of deep discounting under costs in an effort to stimulate sells. Earnings were 1.97/share versus $1.41 last year.

With a continued increase in consumer spending, which recently posted a 3.2% increase, its strongest since 2010, consumer confidence, and the housing recovery, consumer discretionary stocks should continue to outperform. Wait for a pullback and then add to these positions.

Source: The Housing Fab 4