Home Sweet Home Improvement for Investors

Originally published on U.S. News & World Report, January 29, 2015.

The housing market continues its robust performance. So how can investors tell the right fit from the money pit?

It's one matter to plunk down a nice chunk of change on a dream house. But for investors, there's another side of homeownership that's just as relevant and doesn't even require a mortgage: buying stocks connected to the recent housing boom.

The latest S&P/Case-Shiller National Home Price index should provide more comfort than the coziest den. It jumped 5.3 percent in November from a year ago, marking the 43rd consecutive month of positive gains. Leading the way are the hot markets in San Francisco, Denver and Portland, Oregon, which marked increases of 11 percent each.

And where the Case-Shiller goes, so could those stocks associated with the home improvement industry – even as the rest of Wall Street scrambles for sanctuary.

"Despite the volatility we're seeing in the global markets, the U.S. housing industry is likely to see continued growth in 2016," says Andrew Wetzel, portfolio manager and senior research analyst with the F.L.Putnam Investment Management Co., based in the Boston area.

Yet one index, healthy as it is, doesn't mean investors should break ground on a mansion just yet. "While housing prices per the Case-Shiller Index have increased over the past year, this did not necessarily mean that real estate stocks were good investments," says Stephen Ciccone, associate professor of finance and department chair at the Peter T. Paul College of Business and Economics in Durham, New Hampshire. "Many underperformed versus the [Standard & Poor's 500 index]."

So where should investors move in and where should they pull up stakes? The experts weigh in on some key stocks connected to home improvement and housing industries.

Whirlpool Corp. (ticker: WHR) Last year wasn't kind to this appliance maker, as WHR stock dropped by a third. But as with many investments in the current market, Whirlpool may have hit a bottom that places it as ready to climb. Seven of nine analysts rank it as a "strong buy," and portfolio managers such as Bill DeShurko are watching closely. "It's a new stock on my watch list, which means I like the fundamentals," says DeShurko, a portfolio manager on Covestor and president of 401 Advisor in Centerville, Ohio. It also helps that the raw materials for appliances are cheap: "Appliances are made of steel, aluminum and plastic," he says. "Low commodity prices mean lower costs, which help margins." So once you clean up in the market, buy a dishwasher and clean up your pots and pans.

Fortune Brands Home & Security (FBHS) While the name might not sound familiar, its brands are: These include Omega Cabinets, Moen faucets and Therma-Tru doors. And looking ahead, Wetzel sees good fortune. "With an $8.3 billion market capitalization, this is our favorite home improvement stock going into 2016," he says. "Fortune is a market leader in each of its segments and sales in the core U.S. market are approximately two-thirds repair and remodel activity and one-third new construction."

Lowe's Companies (LOW) Like a PVC pipe laced with Super Ball rubber, Lowe's has bounced around the past 12 months before landing roughly flat where it started. In the longer term, it's an impressive growth story, up more than 40 percent since July 2014, and has climbed the ladder by nearly 180 percent since 2011. But is LOW stock finally at the top rung? "After four years of large gains, we recently sold Lowe's from our portfolio," says Mark Holder, a portfolio manager on Covestor and managing member of Stone Fox Capital Advisors in Broken Arrow, Oklahoma. "Before the recent sell-off, the stock was trading for roughly 19 times forecasted earnings of $3.97." Holder points out that Lowe's must grow profits by 20 percent in 2017 to meet that target. In other words, if you still have you receipt handy, you might want to return that ladder and get back on solid ground.

D.R. Horton (DHI) This Texas-based homebuilding company acquires and develops land in the U.S. housing market across 27 states and 79 markets, making it the largest in the nation. "It constructs and sells single-family detached homes and attached homes such as townhomes, duplexes, triplexes and condominiums," says Angelo DeCandia, professor of business and accounting at Touro College in New York. Excitement is building, too: "Several analysts have upped their opinions of this stock based on the company's focus on entry level consumers, citing Horton as best-positioned to service the first-time buyer market." Its first-quarter earnings, as reported Monday, met earnings expectations but fell slightly short on the revenue side. But five out of 15 analysts recommend DHI as a "strong buy," with twice as many calling it a "hold" and none giving it a negative rating.

Restoration Hardware Holdings (RH) Online retailers such as Amazon.com (AMZN) have taken a chunk of business from many big-box retailers in the home improvement space. But one such company appears safe from such poaching: Restoration Hardware, based in Corte Madera, California. The last two months have not been kind to Restoration, as its stock slipped by more than 40 percent. But market observers consider it oversold – buy low and sell high, right? – and more than two-thirds of analysts (11 out of 16) call RH stock a "strong buy." "Restoration Hardware could see a surge because they focus on more specialized markets and are typically found in higher-end areas," says Chuck Fulkerson, director of instructor development at the Online Trading Academy, based in Irvine, California.

Over 100,000 Lessons from the Pros readers. Check out last week's issue.

Free Class