Few can argue with the returns from housing stocks. The group, as measured by the S&P Supercomposite Homebuilding Index, has gained 112% over the past two years, despite warnings along the way that the real estate market was already saturated.
Relatively low interest rates and a steady economic backdrop should help these stocks keep their momentum into the first half of 2005. Unfortunately, none of the major homebuilders trade in the single-digits anymore, so we set our sights on finding other housing-related stocks in the under $10 universe that take advantage of this thesis for the Stocks Under $10 model portfolio.
The most intriguing name we came across was whirlpool bath specialist Jacuzzi Brands (JJZ). The company derives more than 90% of its revenue from bath and plumbing products, marketed through recognizable brands like Jacuzzi, Sundance and Eljer, while the remainder comes from its Rainbow vacuum cleaner systems. Jacuzzi sells both directly to wholesalers that supply homebuilders, and to retail customers through its relationship with Home Depot, its largest customer, and Lowe's .
Jacuzzi shares are up 21% for the year to $8.58, but have given back 10% since Dec. 1. That values the stock at 15 times expected 2005 earnings, which could prove conservative if housing growth is robust and interest rates remain favorable for borrowers. We are not adding the stock to our model portfolio at this point because we already have 17 positions, but we are placing Jacuzzi near the top of our watch list because we believe shares will trade into the double-digits over the next 12 months.The company reported September quarter earnings Dec. 9, delivering sales of $343 million and earnings of 18 cents a share. Both numbers are better than the same quarter last year, when the firm recorded revenue of $327 million and earnings of 6 cents a share. While the numbers appeared solid to us, led by margin gains at Jacuzzi's core bath division (two-thirds of total sales), some analysts were less optimistic about the company's quarter, citing "poor earnings quality," primarily related to currency benefits. But just last week, Halpern Capital's David Sterman changed his tone after a meeting with management convinced him the "rebound still has legs."