3 Companies That Could Benefit From A Housing Sector Rebound

Includes: LL, SHW, USG
by: Mitchell Harris

After years of sluggish performance in the home buying sector, there is light at the end of the tunnel. It would have happened MUCH sooner, but of course our financial system does not know which way is up or down. The banks took TARP money, were supposed to be lending it out to people with good credit, but have yet to do so. Interest rates are so low right now that these institutions are beginning to realize that it is time to let Americans borrow. That being said there are some stocks that are poised to do well over the next 6 to 12 months. The key is that the positive data and forward momentum in the housing market have to continue. All of the companies mentioned have been doing well which is why I believe they will continue to prosper.

Sherwin Williams (NYSE:SHW) is the store that seems to be in everyone's town. I like many, am intimidated to walk into a Lowe's (NYSE:LOW) or Home Depot (NYSE:HD) and ask a question. There is something about that local hardware store that has been around for years that people still support. SHW has that same feel. It has been around since 1866 and currently operates 4,000 stores. There is nothing fancy about the locations, the stores have a great selection and people are very helpful and far from intimidating. The stock, if you are a competitor, has been extremely intimidating, currently trading at $143, and a $1 from a 52 week high. The stock is up nearly 100% in the past year, and with a rebound in the housing market, it will continue to trend higher. 70% of the stock is held by institutions, and 17% by insiders. Return on equity is 32%, quarterly earnings growth 27%, and the PE is still under 30 even with a double in the stock price. In July of 2012 the company beat the street on all their earnings numbers. Fitch just reaffirmed their debt rating to A, and commercial paper rating to F1, conferring a stable outlook for the company. In an age when ratings are being cut left and right this is a good sign. SHW is the leader in the architectural coating industry.

Lumber Liquidators (NYSE:LL) is a specialty retail store operating 277 locations in 46 states. If you need anything related to hardwood flooring, this is the store for you. Pre finished domestic and exotic woods, to engineered and unfinished, bamboo, cork, etc. I know the 52 week return of over 200% may scare the heck out of you, but here is a company, a retail store mind you, that has zero debt. How refreshing. Institutions control the lion's share of the stock and as of August the short position is 25.5% of the float. The shorts are getting absolutely crushed in LL, and at some point they will need to cover. Quarterly earnings growth is over 100% as well, and this is during the WORST economic environments. In September 2010 the stock was $25, and it remained stagnant for an entire year, which demonstrates good market positioning. The stock is currently trading at $44, and I think $50 is obtainable in the short term. The Federal Reserve will continue to stimulate the economy, and force banks to lend money for homebuilding. As the country starts to whittle away at inventory, homes will be built, and in the meantime the "do it yourself" homeowner will continue to keep these specialty stores thriving.

USG Corp (NYSE:USG) is one I have been pounding the table on for a year. Anyone who has followed my writings will know we have done exceedingly well. USG has been around since 1901, so staying power is hardly an issue, they sell every type of wall board (gypsum) and joint compound for residential, commercial, and institutional. The list of materials they manufacture is just too long to list here. The stock, similar to the others in this article, is up 140%, to $20.55 for the past 52 weeks. Do you see a pattern forming here? I still think it trades to $25 in the near term as well. The balance sheet boasts $480 million in cash, or $4.45 per share which is great. The one issue I have that my readers need to focus on is that the money flow has to start picking up. The industry as a whole does not boast wide margins, and flow is the only way companies can pay down debt. USG is hardly the perfect stock, and parts of its balance sheets would have some investors running for a money market.

75% of the stock is held by institutions. It seems these hedge funds/mutual fund families are betting on the rebound in homeownership as well. USG expands on that because there isn't any building or school, or airport, or development that does not utilize their products. 32% of the float is short as there will always be doomsayers. Well they are getting killed on their positions, and as the stock trends higher, they will be forced to cover, bringing more buying to the stock. Watch USG closely, and due to its balance sheet issues, you may want to write some covered calls with tight stops to protect yourself.

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.