In its biggest gain since May 2006, the Case-Schiller home price index hit 9.3% in February, compared to the same period last year. A commonly used indicator of housing prices, the index suggests that the US housing market is finally picking up some real speed. So how can investors take advantage of the momentum?
We began by screening companies related to the housing market for positive DuPont breakdowns based on return on equity (ROE). The DuPont formula uses ROE for its profitability measurement. The higher the ROE, the more profitable the company appears, but this profitability can come from many sources - some stronger than others.
In general, an encouraging DuPont breakdown implies one or more of the following:
- Improving Net Profit Margin, i.e., higher Net Income/ Revenues
- Improving Asset Efficiency, i.e., higher Sales/Assets
- Decreasing Financial Leverage ratio, i.e., lower Assets/Equity
Companies passing all requirements are thus experiencing increasing profits due to operations and not due to increased use of leverage.
This screen turned up three companies, so we looked at each in greater detail, searching for more positive signs among their earnings per share data, revenue and inventory turnover and performance this year.
For an interactive version of this chart, click on the image below. Average analyst ratings sourced from Zacks Investment Research.
Do you think the bump in home prices will boost these stocks? Use the list below as a starting point for your own analysis.
1. Standard Pacific Corp. (SPF): Operates as a diversified builder of single-family attached and detached homes in the United States. It also operates financial services, consisting of mortgage financing for its home buyers and title operations for home buyers in Texas.
- Market cap at $1.94B, most recent closing price at $9.01
- EPS this year: 2994.19%
- EPS next year: 55.56%
- EPS past 5 years: -36.24%
- EPS next 5 years: 5.00%
- EPS quarter over quarter: 110.18%
- Performance (quarter): 7.78%
- Performance (YTD): 22.59%
- MRQ net profit margin at 6.% vs. 3.75% y/y. MRQ sales/assets at 0.116 vs. 0.104 y/y. MRQ assets/equity at 2.428 vs. 3.44 y/y.
The EPS estimate for the company's current year increased from 0.32 to 0.36 over the last 30 days, an increase of 12.5%. This increase came during a time when the stock price changed by 9.26% (from 8.86 to 9.68 over the last 30 days).
SPF has performed in line with the rest of its industry since 4/29/13, returning -2.38% over the last month. This performance has been better than Lennar Corp. (NYSE:LEN) and DR Horton Inc. (NYSE:DHI), but worse than industry leaders like PulteGroup, Inc. (NYSE:PHM) and Toll Brothers Inc. (NYSE:TOL), which returned 3.96% and 0.82% respectively.
The company has reported strong earnings growth over the last year, with EPS growing by 2994.19%, higher than competitors like TOL (EPS growth over the last year at 1111.57%) and LEN (EPS growth over the last year at 543.12%).
Short sellers think there's more downside to the stock, especially when comparing short float to industry averages. SPF short float stands at 18.53%, which is equivalent to 7.85 days of average trading volume. As an example, this is much higher than TOL (short float at 6.0%, representing 2.39 days of trading volume) and PHM (short float at 7.73%, representing 2.91 days of trading volume).
SPF reported earnings for the first quarter of 2013, featuring increases in completed sales (48%) and orders for new homes (49%) compared to the same period last year. Total revenue grew by 60%, to $357.7M, which came out ahead of analyst predictions of $354.1M.
2. Trex Inc. (NYSE:TREX): Distributes wood/plastic composite products primarily for residential and commercial decking and railing applications in the United States. Most products are manufactured combining waste wood fibers and reclaimed polyethylene.
- Market cap at $956.8M, most recent closing price at $55.66
- EPS this year: 121.17%
- EPS next year: -17.06%
- EPS past 5 years: 8.23%
- EPS next 5 years: 20.00%
- EPS quarter over quarter: 69.50%
- Performance (quarter): 17.67%
- Performance (YTD): 49.50%
- MRQ net profit margin at 19.99% vs. 12.81% y/y. MRQ sales/assets at 0.425 vs. 0.346 y/y. MRQ assets/equity at 2.168 vs. 2.658 y/y.
Revenue grew by 12.26% during the most recent quarter ($107.88M vs. $96.1M y/y). Inventory grew by -19.45% during the same time period ($15.03M vs. $18.66M y/y). Inventory, as a percentage of current assets, decreased from 12.13% to 10.73% during the most recent quarter (comparing 3 months ending 2013-03-31 to 3 months ending 2012-03-31).
TREX has recorded great gains over the last month, when compared to its closest competitors. The stock returned 13.68% since 4/29/13, better than Vulcan Materials Company (NYSE:VMC) and Martin Marietta Materials Inc. (NYSE:MLM), which returned 11.33% and 11.13% during the same holding period.
The company has reported strong earnings growth over the last year, with EPS growing by 121.17%, higher than industry peers like VMC (EPS growth over the last year at 28.54%) and Advanced Environmental Recycling Technologies, Inc. (OTCQB:AERT) (EPS growth over the last year at -254.13%).
TREX has a higher than average projected earnings growth rate over the next 5 years (20.0%). This is better than the likes of Masco Corporation (NYSE:MAS) (projected EPS growth over next 5 years at 10.0%) and VMC (projected EPS growth over next 5 years at 9.67%).
Earlier this month, TREX received the 2013 Green Award from Washingtonian Magazine, which recognizes companies in the DC metro area that promote eco-friendly living and help to improve the environment. The company's high-performance decking products are made from nearly 100% recycled materials. According to The New York Times, TREX salvages over 400 million pounds of wood and plastic every year from landfills.
3. Lumber Liquidators Holdings, Inc. (NYSE:LL): Operates as a specialty retailer of hardwood flooring in the United States.
- Market cap at $2.3B, most recent closing price at $83.87
- EPS this year: 80.65%
- EPS next year: 19.01%
- EPS past 5 years: 28.52%
- EPS next 5 years: 15.00%
- EPS quarter over quarter: 97.55%
- Performance (quarter): 41.58%
- Performance (YTD): 58.75%
- MRQ net profit margin at 6.85% vs. 4.36% y/y. MRQ sales/assets at 0.645 vs. 0.576 y/y. MRQ assets/equity at 1.421 vs. 1.504 y/y.
Revenue grew by 22.54% during the most recent quarter ($230.42M vs. $188.03M y/y). Inventory grew by 9.56% during the same time period ($210.09M vs. $191.75M y/y). Inventory, as a percentage of current assets, decreased from 71.4% to 70.44% during the most recent quarter (comparing 3 months ending 2013-03-31 to 3 months ending 2012-03-31).
TTM Return on Assets at 16.51% vs. an industry average at 10.8%.
LL has performed poorly since 4/29/13, especially when compared to industry competitors. The stock returned 1.94% over the last month, much lower than Lowe's Companies Inc. (NYSE:LOW) and Builders FirstSource, Inc. (NASDAQ:BLDR), which returned 12.65% and 12.03% during the same time period. Only Orchard Supply Hardware Stores Corporation (OSH) performed worse, returning -4.35%.
When comparing valuation ratios to industry averages, Lumber Liquidators Holdings, Inc. looks expensive. The stock's Price / Free Cash Flow ratio stands at 65.43, much higher than BLDR (P/FCF ratio at 0) and OSH (P/FCF ratio at 0), and even The Home Depot, Inc. (NYSE:HD) (P/FCF ratio at 30.06).
The company has reported strong earnings growth over the last year, with EPS growing by 80.65%, higher than competitors like LOW (EPS growth over the last year at 17.83%) and BLDR (EPS growth over the last year at 16.25%).
Investor's Business Daily noted the housing market also faced some bad news this week, with mortgage applications falling by 8.8%, reported by the Mortgage Bankers' Association. Yesterday, LL fell 3% in soft trade, just as lumber futures have been dropping on the Chicago Mercantile Exchange.
*Accounting and DuPont data sourced from Google Finance, EPS data sourced from Yahoo! Finance, all other data sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: Business relationship disclosure: Kapitall is a team of analysts. This article was written by Emily Smykal, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.