While the litany of dour housing data continues -- steady foreclosures, stagnant housing starts, falling home values, and fewer mortgage applications -- there are housing-related companies that have minimal downside risks and very strong upside potential for when the housing market eventually improves.
Consider that the low level of new home construction does not alleviate the need for maintenance and upkeep of existing homes. Homeowners and landlords have not quit painting, repairing, and modernizing their property, for instance. The rental market, in fact, is strong in many areas of the country. Multi-family housing starts are up almost 8% in July and FHA multi-family mortgages are at a record high. So property managers with long lists of potential tenants will keep painting the walls, caulking tubs, and replacing the faucets and flooring.
Moreover, homeowners with little or no equity in their homes are less likely to pursue major remodels but still likely to make cost effective cosmetic improvements such as painting (often cited as the dollar for dollar best return on investment in home improvements). In addition, banks looking to move REOs or investors flipping foreclosures will find these neglected properties at least need new paint, flooring and fixtures to be marketable. In this environment, several companies can continue to generate revenues while remaining poised for even greater gains when the housing picture brightens.
RPM International (NYSE:RPM) is one of the undisputed leaders in this niche. An earlier piece offers a solid overview of RPM. This company is the prototype firm for maintaining and prolonging homes. It has the #1 market position in residential caulk and sealant in North America with its DAP line; the #1 rust preventative brand for small project painting in Rust-Oleum; the #1 in Canada and #2 in US interior wood stain, repair and maintenance in Varathane. The company also has the popular Zinsser line of primers and sealers along with a dozen other brands all set around the patch, prime, and seal theme. The residential side accounts for 32% of RPM net sales.
The commercial side is where RPM garners the bulk of its sales (68%), however, with much the same theme -- seal, prime, coat -- as the residential products. And owners of commercial buildings have not halted maintenance and repairs. RPM has a number one position in a variety of industrial sealant markets, with strength in roofing, concrete maintenance and repair, corrosion control and window and door systems. RPM also has sales in 150 countries, so the firm is not stuck in lockstep with the US housing market or economy. Ongoing federal and state incentives for energy efficiency could further boost several product lines, and investors are paid to wait for the construction uptick with a stellar dividend (4.3% yield and 37 straight years of increases). RPM is frequently cited as a dividend champion.
Continuing with the maintenance and repair theme, Masco (NYSE:MAS) is a beaten down victim of the housing meltdown but can still make a case for being a player in the paint and repair niche. The firm's Behr paints and stains along with its Kilz primer offer cost-effective cosmetic repairs and have premium shelf space at Home Depot (NYSE:HD). Masco's Delta and Peerless faucets and plumbing items are candidates for low cost upgrades and common wear points that require replacement. And Masco has market leadership in fasteners through its Arrow segment that offers the staple guns, rivet tools, hammer tackers and other fasteners commonly used in insulation upgrades, roofing and flooring. The company also has a host of other plumbing lines as well as 20 lines of cabinets (KraftMaid, Merillat, etc.) in the US and Europe. Masco also has strength in the windows market (Masco owns Milgard and other lines of windows); windows are a key component of weatherization and are also common wear points that are replaced in aging homes. Masco will also pay you to wait for the housing rebound with a solid dividend (3.7% yield), but its strength in cabinets and windows currently makes the firm lean more towards new housing and major remodeling than repair overall.
Along with RPM and MAS, there are pure paint plays such as Valspar (NYSE:VAL) and Sherwin Williams (NYSE:SHW), both of which continue to show bright colors amid the dark housing doldrums. Both offer dividends at higher rates than short term CDs (2.3% for VAL and 1.98% for SHW). PPG also makes paints, coatings, sealants and chemicals. It's window glass and paints (Pittsburgh, Olympic, Lucite) align PPG with RPM and Masco, but PPG has a wider involvement in the chemical, industrial, auto and aerospace sectors that all add revenues even while new home construction stalls. PPG's other industries give it strong current prospects and a solid dividend (3.15% yield). PPG is a firm that provides the coating for your car, appliances as well as the home.
And, finally, while Berkshire Hathaway's (NYSE:BRK.B) construction and housing segments are often associated with new homes (Clayton Homes, Acme Brick, etc.), it has solid commercial roofing exposure in Johns Manville and a large flooring unit in Shaw, and both flooring and roofing are generally replaced at intervals on existing buildings. Also, Berkshire has a strong premium paint line in Benjamin Moore. Add on insulation from Johns Manville for energy upgrades, and Berkshire is a decent play for building maintenance and very well positioned for increases in new home construction and sales.
Overall, these stocks are positioned to generate revenues from improvements to existing homes and commercial property even while new home construction runs well below its historical average. A reversion to the mean will eventually result in an uptick in the housing sector. This increase in new homes could offer a potential boost to these housing related stocks and the downside for these firms that offer products for existing homes and rental units is minimal relative to the potential upside when the market moves. Best of all, these "spruce up" stocks trade at reasonable P/E ratios and many pay solid dividends.
Disclosure: I am long MAS.