Today's Market: Housing Stocks That Are Buys

Includes: HD, LOW, WHR, XHB
by: Matthew Smith

The housing sector remains a mystery to many in the market with some of the smart money saying that it is getting better and is strong and others disappointed with the recovery. We find ourselves happy with the current state of the market, although we would not complain if there were more interest in new single family homes because this would be helping the economy show real organic growth.

There are some banks we like that have risk-adjusted mortgage exposure and would benefit from a housing recovery as well as some other types of names we like that are not truly directly housing related plays. As much promise as some of those names hold, we would rather play it simple and own names such as Home Depot, Lowe's and even Whirlpool to benefit from what we perceive will be a strengthening housing market. We want direct exposure on a national level sans the homebuilders and those three appear to be some of the best names out there still.

We will know a lot more about the state of the housing market when Lowe's reports tomorrow and the Existing Home Sales figures are released, but today it does appear that the momentum continues to build.

Chart of the Day:

We are not uber bullish of the homebuilders because we see less upside as a group than we see in sectors that benefit from a strong housing market. You really have to pick your spots with the homebuilders at this point and picking companies with great businesses is difficult enough, but having to then look regionally and locally at their holdings is far too involved. We want national exposure and the easiest way to achieve that is through the home improvement warehouses and appliance makers. Yes buying the ETF would be easy, but the risk outweighs the reward in our opinion.

(Click to enlarge)

Source: Yahoo Finance

We have economic news today and it is as follows:

  • Employment Cost Index (8:30 a.m. EST): Est: 0.5% Actual: 0.4%

Asian markets finished mostly lower today:

  • All Ordinaries -- down 0.59%
  • Shanghai Composite -- down 0.19%
  • Nikkei 225 -- down 0.25%
  • NZSE 50 -- UNCH
  • Seoul Composite -- up 1.04%

In Europe, markets are trading lower this morning:

  • CAC 40 -- down 0.92%
  • DAX -- down 0.18%
  • FTSE 100 -- down 0.44%
  • OSE -- down 0.41%

Housing Market Still Powering Results

It is true, regardless of what the talking heads would have you believe. The housing market may not be as strong as it was during the go-go days of 2006-2008 but those were bubble years and if we are being honest with ourselves one has to admit that the current numbers are pretty respectable. They are even more respectable when one realizes that homebuilders are not giving discounts to buyers and are only taking the most profitable business at the end of the day. It helps their margins, keeps the integrity of the market intact and most importantly has kept a pent up demand in place for new housing at a time when buyers might have to rush into the market to beat being priced out of the market by rising rates.

We have been bullish all things housing now for some time. It is true that we have booked some profits in certain names, Whirlpool (NYSE:WHR) for instance, but have remained bullish of the overall thesis because of the data we are seeing as well as what we are hearing from our industry contacts. We continue to believe that the home improvement warehouses will do well in this environment because even though the resale market is not what many had hoped for, coupled with the 'disappointment' over new single family homes, one fact is clear; the housing market is recovering and many families are seeing their largest asset come out from under water.

That last sentence is key, because people whose houses are not underwater spend a lot more on their home in terms of upgrades and remodeling which is what drives sales at names such as Home Depot (NYSE:HD) and Lowe's (NYSE:LOW). Thus far in the cycle it has been Home Depot which has seen its business outpace Lowe's and after this latest quarter it appears that Home Depot will once again retain that crown. We have long suspected that a rotation would occur in regards to the consumer's habits and force a switch to Lowe's as more women got involved in projects - as is typically the case during good economic times because upgrades and remodeling projects are done out of luxury as opposed to need.

It appears that Home Depot is breaking out here. Solid results from competitor Lowe's tomorrow could create another leg up for these stocks as investors revalue them based upon their updated guidance.

(Click to enlarge)

Source: Yahoo Finance

Looking at the numbers Home Depot reported today we are pretty impressed by the strength. The company easily beat on EPS figures as they reported $0.95/share when Wall Street analysts were expecting $0.89/share. The results were powered by same-store sales which came in higher than expected - rising 7.4% while the consensus was for a rise of 5.9%.

The outlook was also quite positive from Home Depot as they raised their FY guidance to indicate $3.72/share in earnings, up from their previous guidance of $3.60/share.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.