The harsh winter conditions have negatively impacted the housing market, but the underlying long-term fundamentals appear to be in place and have not worsened.
If the economic renewal continues, my sense is that the housing market will strengthen as we move along this year, which means continued opportunities in the housing market—but where?
While we were straddled with soft housing starts (-16%) and building permits (-5.4%) in January, homebuilders continue to report good growth and order backlogs. With the continued historically low interest rates, the housing market has been able to grow.
Other than the homebuilders, I like the area of home construction and renovation supplies. While January existing-home sales were down slightly from December, homeowners seem to be spending more on renovating the homes they already bought.
In my opinion, the “Best of Breed” in the building suppliers space is The Home Depot, Inc. (NYSE/HD), which beat earnings-per-share (EPS) estimates in its fourth-quarter earnings season but fell slightly short on revenues. On the plus-side, The Home Depot saw a 4.4% rise on companywide same-store sales in the fourth quarter, including a 4.9% year-over-year rise in the U.S. housing market. Those are pretty good metrics, despite some stalling in the housing market. And while I continue to rate The Home Depot as the top in its class, its market cap of more than $110 billion is huge.
What I suggest you do in the housing market regarding the construction and renovation suppliers is to take a look at small-cap Builders FirstSource, Inc. (NASDAQ/BLDR), which operates out of Dallas, Texas and has a much more manageable market cap of $838 million.
Chart courtesy of www.StockCharts.com
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 markets.
There’s good upside potential in the housing market, as Builders FirstSource outperformed the S&P 500 over the past year with a 43.27% advance versus 22.67% by the S&P 500.
The company has steadily grown its annual revenues over the past three years to 2012. The growth is expected to continue with revenue growth of 40.3% to $1.5 billion this year followed by a 23.7% jump to $1.88 billion in 2014, according to Thomson Financial.
Hence, if you are looking for a smaller home supplies company that offers exceptional price appreciation potential, take a look at Builders FirstSource as a possible buying opportunity.