4 Housing Recovery Stocks to Watch

The housing recovery might take a while, but that doesn't mean consumers should stay away from all housing stocks.
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BALTIMORE (Stockpickr) -- The focus was on the housing market to start this week, as September existing-home sales numbers and the S&P/Case-Shiller August Home Price Index data hit the public for the first time.

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Not surprisingly, the numbers were mixed. While home sales rang up higher than anticipated (a good sign, given the glut of inventory right now), home prices fell slightly for the month of August.

It's been made abundantly clear that the housing recovery will take a while, but that doesn't mean that consumers should completely stay away from all housing stocks. With incredibly ground-down valuations and a track record of surviving in this economy, a handful of housing stocks could make for interesting long-term bets right now -- especially ahead of next month's housing data.

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Here's a look at

some of the stocks

that could be most deeply impacted by signs of a housing recovery.

Improvement in Home Improvement Stocks

Home improvement stores have seen their share of pain as a result of the recession. With exposure to the housing market as well as soft retail sales, this industry has been in need of improvement itself after peaking in early 2007 -- nearly a full year before the rest of the stock market.

Home improvement stores haven't been major beneficiaries of the recovery in equities either; while the S&P is at least back at breakeven for the trailing five years, the leading home improvement stocks are still down 20% to 30% over that same period.

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One reason for that is the financial stress that home improvement firms took on in the name of growth. With skyrocketing sales in the early half of the 2000s, management teams sought out growth through debt-fueled expansion, only to face tough times in 2007 and 2008. But if nothing else, the recession has helped to shore up these firms' balance sheets.

Leading the home improvement pack are

Home Depot

(HD) - Get Report

and

Lowe's

(LOW) - Get Report

, two companies that have nationwide footprints, identical business models, and nearly identical valuations. Both stocks trade for a similar earnings multiple (17.85 and 16.63, respectively), both pay a decent-sized dividend, and both maintained respectable profitability throughout the recession.

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Given the popularity of do-it-yourself projects as an alternative to pricey renovations for budget-conscious Americans, both of these firms should benefit from improved financial prowess ahead of a full-blown housing recovery.

Is It Worth Buying Homebuilders?

Of all the industries hit by the recession, homebuilders were hit the hardest. Like consumers, homebuilders' operations were predicated on the idea that real estate values couldn't drop -- and as a result, these firms were left overleveraged and overrun with inventory when housing valued did fall.

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For homebuilders, low valuations are largely warranted. That said, not all homebuilders are created equal.

Take

D.R. Horton

(DHI) - Get Report

, for instance. This $3.3 billion Texas-based builder saw shares drop from $40 back in 2006 all the way down to their current price of $10.58, all the while slashing dividends and suffering from highly cyclical, pared-down sales. But this stock adapted too, cutting overhead costs and minimizing the effects of losses. Unlike many peers, Horton took advantage of boom times in 2005 and 2006 to drastically reduce its debt load and improve efficiency -- moves that ultimately proved prescient as less-solvent firms folded.

>>Who Owns D.R Horton?:

Arnie Schneider

There are still considerable challenges for D.R. Horton in the future, but sales appear to be on the upswing, and management's decision to keep paying its dividend throughout the crisis is laudable. I'd watch this stock closely for the next few quarters.

REITs That Beat Residential Real Estate Prices

Real Estate Investment Trusts (better known as REITs) became popular investment vehicles in the last decade as investors sought exposure to the then-booming real estate market. These trusts invest in real estate, appreciating in-line with property values and paying out the vast majority of their income to shareholders. It's a structure that proved incredibly popular when times were good, but much less so of late.

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Even though an increase in housing prices would bode well for residential REITs, commercial REITs provide a more attractive option -- especially those that own properties with high barriers to entry. One solid play is

Digital Realty Trust

(DLR) - Get Report

, a $5.2 billion trust that invests primarily in datacenters used to run companies' IT infrastructure. Datacenters are in demand right now, with customers' needs quickly outpacing the supply of facilities throughout the country.

Although Digital Realty's 3.59% dividend yield falls short of some of its competitors, this trust's stable asset base makes it a smart decision for risk-averse investors -- especially as increasing residential real estate prices spark loftier valuations among other types of properties.

>>Who Owns Digital Realty?:

Ken Heebner

To see a slew of other stocks that stand to benefit from a housing recovery more than their peers, check out the

Housing Recovery Stocks Portfolio

on Stockpickr.

-- Written by Jonas Elmerraji in Baltimore.

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At the time of publication, author had no positions in stocks mentioned.

Jonas Elmerraji is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.