Universal Forest, Fortune Brands: Two Stocks for Improved Housing Starts

 |  Includes: BEAM, IYR, UFPI, XHB
by: JunoTrade

Is everyone sitting down for the good news? It would seem that the storm has passed, the correction phase of the market may be over, and the economy has finally stopped contracting from the desperate state of affairs of the last three years. And how do we know this good news? Housing starts are up to an important and identifiable 5th month high, a significant 0.3% increase from the corrected rate for August figures.

With this encouraging data, the 'Basic Materials' sector is a good place to look for buying opportunities. In particular, let's take a look at 'Lumber, Wood Production' and 'Home Furnishings & Fixtures'.

In the 'Lumber, Wood Production' category Universal Forest Products, Inc. (NASDAQ:UFPI) looks like it could be a good opportunity with a current price of $30.53 and the following:

52 week high 46.63
52 week low 25.76
Market Cap. 584.72M
Forward P/E 19.08
Price/ Book 1.02
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In the 'Home Furnishings & Fixtures' category, Fortune Brands, Inc. (FO) could be positioned for growth with a current price of $55.08 and the following:

52 week high 59.40
52 week low 37.05
Market Cap. 8.4B
Forward P/E 15.79
Price/ Book 1.6
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There is one slight problem: the drop in housing permits which are the prime indicators of new starts in building homes for the succeeding 1-2 months. In fact, these permits might be considered the earliest measures of predictability in housing construction, because they show intent before a shovel is even laid to the ground. The undeniable fact is that permit issuance has dropped to the lowest level in a year, down 5.6%. This makes it the dreariest it has been since April of 2009.

How do we reconcile these 2 seemingly incongruous figures and still retain our optimism about the future recovery of the American economy? One important factor is the 20% drop in building permits and construction of multifamily units during this time period. Sociologists may offer an educated opinion of why housing families together is less appealing to the construction industry right now, but the decision is probably more closely related to financial feasibility in an already skittish market. In any case, when you remove the multifamily statistics, it is heart-warming to see that single family home starts showed a timid but determined 4.4% increase.

Traditionally, home starts have been the harbinger of good news for the rest of the economy. Recovering from the worst depression since the 30s has been a monumental task, helped or hindered by artificial government stimulus packages, depending upon whom you talk to.

The current issues affecting the banking foreclosure processes, the dismally low record of existing home sales, and the jobless rate are all part of the symbiotic relationship between housing and the economy. Typically, when people are unable to build new homes and housing starts drop, the jobless rates begin to soar. Less construction means less available work, not just at the lumber yard or the home building store, but also for the lawnmower sales person, the carpet man, and the local plumber. Even the fine china department will lay off extra help when sales drop because there are less new homes to furnish and less discretionary money for luxuries such as good dishes. The more people that are not collecting a paycheck, the lower prices need to be to encourage purchasing, and now the inflation factor rears its ugly little head. And so on…

It’s encouraging that those who know how to make money in any economy, men such as Warren Buffett and Sam Zell both agree that we are, in fact, seeing the beginning of a very slow but determined restoration in the economy. They predict significant signs by the end of 2010 and more strength by mid-2011. As the expansion phase of a new business cycle commences, housing construction is often one of the key first indicators. Is that what we may have glimpsed this month?

No one is suggesting that we are going to wake up to a brave new world tomorrow, one in which everyone who wants to work is joyfully employed, and every family sits comfortably in the house of their dreams. However, the National Association of Home Builders and Wells Fargo Confidence Index is now at the highest level it has been for the last 4 months. If we have to pick between the pessimists of this country and the optimists, I’m siding with the Home Builders.

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Disclosure: No positions