
Best Plays in Housing Rebound: Home Depot, Lowe’s and Horton
The housing market's rebound may have never looked this strong. With inventories scraping bottom, new and existing home prices are at or near record highs. Also, the numbers for new and existing home sales are at levels not seen since before the Great Recession.
To be sure, it's a huge and diverse sector of the economy and investors will not find good investments just anywhere.
However, some of the potentially best investments in the housing market are among the most visible. The biggest brands -- Home Depot (HD) - Get Report , Lowe's (LOW) - Get Report , D. R. Horton (DHI) - Get Report and Lennar (LEN) - Get Report -- all at the top of their markets, have had stellar stock runs during the rebound that have swamped the S&P 500 Index (SPY) - Get Report gains and show excellent signs of healthy returns down the road.
Indeed, in a list of 35 best stocks for October and November it released this past week, Oppenheimer named Home Depot No. 3. It is, noted Brian Nagel, the analyst who follows the company for the firm, "well-positioned to capitalize on improving demand trends in the home improvement sector."
His view is consistent with what Home Depot has done and is expected to do. The largest pure play in housing, Home Depot earnings per share gains have been galloping ahead in the 15% to 20% range and a consensus of analysts is forecasting earning increases to continue to grow at about 15% annually for another two to three years.
What goes for Home Depot, may also go for Lowe's, which isn't too surprising. While considerably smaller, Lowe's is easily No. 2 in home improvements and has a business model not unlike Home Depot's.
Sure, investors have taken note of their good fortune. Yet while both stocks are near 52-week highs, they still have price-to-earnings multiples in line with the housing industry average of 22. Moreover, Zacks Investment Research's survey of nearly two dozen analysts still lists a consensus rating of a strong buy for the two home improvement leaders.
Horton and Lennar are also ranked first and second in their business, home building. The closest to a national developer, Horton sells far more homes than Lennar (i.e. 30,000 vs. 21,000 closings last year). However, the lead is much less when it comes to earnings and market capitalization. The reason is that Lennar builds and sells more expensive homes, though buyers for both builders are still in a broad middle class.
Both business models are expected to keep working over the next two years, with a consensus of analysts forecasting earnings growth to reach the low to mid teens. The best part for both companies though may be their share prices. While investors have jumped aboard and also pushed both these stocks toward their 52-week highs, Horton and Lennar are still relative bargains with P/E ratios under 18.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.








