3 Smart Ways to Play the Housing Boom

The U.S. economy continues to expand at a gradual pace. While some corners of the economy are feeling the pinch of slowing global growth and the strong U.S. dollar, the U.S. housing market is booming.
Home prices, according to the S&P/Case-Shiller Index, are within 4% of their 2006 peak. April home sales rose 17% from the same month last year, the strongest monthly performance in more than eight years.
Tight supply and cheap money are helping to fuel the boom. This has led to strong growth for many stocks reliant on the housing market.
Here are the three best ways investors can participate in the U.S. housing boom.

Stocks to Play the Housing Boom: Homebuilders

The economy continues to gradually improve, and home prices are rising in many parts of the country. In addition, last month’s jobs report dud notwithstanding, the low unemployment rate is a huge help to housing.
The most obvious play on the housing boom would be to buy a homebuilder stock such as Lennar (NYSE: LEN) or KB Home (NYSE: KBH).
Lennar and KB Home are on a roll. Lennar’s revenue increased 22% last year, thanks to 16% growth in deliveries. Earnings per share jumped 23% for the year.
Meanwhile, KB Home grew revenue by 23% last year. It benefited from 14% growth in deliveries and an 8% increase in selling prices.
Their success has continued this year, as the housing boom shows no sign of slowing down. Lennar’s revenue increased another 21% in the first quarter, with deliveries and new orders both seeing double-digit growth.
KB Home grew revenue by 17% in the first quarter. As of the June 9 closing price, the stock has returned 18% since the beginning of 2016.
And, both stocks are still fairly cheap. KB Home trades for 16 times its trailing 12-month earnings per share, while Lennar is valued for an even cheaper 13 times EPS.

Stocks to Play the Housing Boom: Home Improvement Retail

Speaking broadly, the retail industry has had a terrible run over the past year. Most physical retailers have seen sales fall significantly, under pressure from internet-based competition. But there are still retailers doing very well in this environment, in particular the home improvement retailers Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW).
Home Depot is the largest home improvement retailer on the planet. It grew comparable sales, which analyzes growth at locations open at least one year, by 5% last year.
This led to 15% earnings growth last fiscal year, and it’s off to an even more impressive start to the current year.
Home Depot’s earnings increased 19% in the first quarter. For the full year, management expects 14% earnings growth in fiscal 2016.
Lowe’s comparable sales rose 7% last quarter. This growth combined with aggressive share repurchases caused Lowe’s EPS to jump 40% for the period. Lowe’s earnings were up 21% in 2015.
Their success allows both companies to return more cash to shareholders each year, through a combination of dividend increases and share buybacks.
Home Depot raised its dividend by 17% this year, and last year approved a massive $18 billion share repurchase authorization. For its part, Lowe’s recently raised its dividend by 25%. It has increased its dividend now for 54 consecutive years.

Stocks to Play the Housing Boom: Banks

Lastly, a strong housing market is a tailwind for the major U.S. banks that concentrate on providing mortgage loans, specifically Wells Fargo (NYSE: WFC).
Wells Fargo is the biggest mortgage originator in the U.S., so it clearly benefits from a housing boom. Indeed, loan growth of 7% last quarter far outpaced the 4% growth in deposits. Total revenue rose 4% in the first quarter.
The housing boom is helping Wells Fargo’s credit quality remain high. The company ended last quarter with a low 0.38% loan loss rate, driven by continued credit quality improvement in residential real estate.
Wells Fargo is a well-run bank with high levels of profitability. The company earned $23 billion in profit last year. The stock is very cheap, trading for just 10 times earnings. And, it offers a very solid 3% dividend yield as well.

Final Thoughts on Housing Boom Stocks

The U.S. housing market is back in a big way. The low unemployment rate and resilient jobs market, along with tight supply, have continued to fuel a steady rise in home prices.
For investors looking to profit from this trend, start with the homebuilders, home improvement retailers and banks. Stocks that benefit from the housing boom such as Lennar, KB Home, Home Improvement, Lowe’s and Wells Fargo are growing at high rates, and their stocks are on a tear.

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