How to Play the Strong Housing Data

Strong Housing DataThe housing market picked up steam in July after some stalling in the first half of the year, which was negatively affected by bad winter conditions in the first quarter. Housing starts surged 15.7% to a seasonally adjusted 1.09 million units in July, the market’s highest production in eight months. This break of one million units is key. Plus, the lagging building permits number was equally strong at an annualized 1.05 million units, up 7.7% year-over-year and 8.1% sequentially versus June.

The metrics clearly indicate a housing market that is strong and growing. Low interest rates continue to be the catalyst that is driving the housing market with the help of an improving jobs market.

An area that I continue to favor going forward in the housing market is the home construction and renovation supplies sector, as homeowners move to renovate their homes.

In this segment, the “Best of Breed” is The Home Depot, Inc. (NYSE/HD), which beat earnings-per-share (EPS) estimates and revenues in its second-quarter earnings season. The company also reported an increase of 5.8% on company-wide same-store sales in the quarter, including a 6.4% year-over-year rise in the U.S. housing market. The Home Depot can be a great stock for buy-and-hold investors, but with a market cap of more than $120 billion, there are alternative growth plays investors may want to consider that aren’t so expensive.

In the small-cap construction and renovation housing market, you may want to take a look at a stock like Builders FirstSource, Inc. (NASDAQ/BLDR), which has a market cap of $669 million.

Builders FirstSource Inc Chart

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Builders FirstSource focuses on the residential new homes construction housing market. The company produces structural and related building products such as roof and floor trusses, wall panels, stairs, aluminum and vinyl windows, custom millwork, and pre-hung doors. In the company’s network are 53 distribution centers and 47 manufacturing facilities that are situated primarily in the southern and eastern United States housing market.

Growth has been steady over the past four years to 2013. Revenues are estimated to grow 9.3% to $1.63 billion, followed by a 13.4% jump to $1.85 billion in 2015, according to Thomson Financial.

A smaller residential and commercial building play that also looks interesting is Installed Building Products, Inc. (NYSE/IBP), which was a new listing in February with a market cap of $405 million. The stock debuted at $12.30, so I see a good investment opportunity here.

Installed Building Products Inc Chart

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Installed Building Products (IBP), founded in 1977, is the second-largest insulation installer for the residential new construction market in the country. With more than 100 locations, IBP also supplies the commercial building and existing-home markets. The company also provides garage doors, rain gutters, shower doors, closet shelving, and mirrors.

Revenues grew from $238.45 million in 2011 to $301.25 million in 2012, reaching $431.93 million in 2013. The growth is expected to continue at 19.0% (to $513.94 million) this year, followed by 17.0% (to $601.55 million) in 2015, according to Thomson Financial.

If you are looking for a speculative housing market play with good growth prospects, you may want to take a look at companies like Builders FirstSource and IBP.