5 hot housing market stocks to buy now

The U.S. housing market has withstood COVID-19. These five housing-related stocks have enjoyed the ride and have more potential to spare.

  • By Will Ashworth,
  • Kiplinger
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The U.S. economy has been severely humbled in 2020 as a result of COVID-19, with very few exceptions. One of those is the housing market – and housing market stocks have the receipts to prove it.

America's GDP declined by an annualized rate of 32.9% during the second quarter, the largest such decline in U.S. history. Bluntly, things aren't good, and while they're expected to improve, a return to prior levels is unlikely until a vaccine can help the world return to normal daily living.

Housing market stocks have remained resilient, however. The SPDR S&P Homebuilders ETF (XHB) has climbed more than 13% year-to-date, versus a mere 3% return for the S&P 500 (.SPX). That's on the back of a U.S. housing market that has returned to January 2020 growth levels, according to Realtor.com.

The Realtor.com Housing Recovery Index, for the week ending Aug. 1, hit 103.8 – 3.8 points above pre-Covid sales. Typically, transactions are strongest in the spring. This year, as a result of the pandemic, the traditional spring surge has moved to August, with the West and Northeast leading the way. Meanwhile, on the new-housing front, June's construction starts (the most recent available data) rose 17% to 1.19 million on an annualized basis. That's the largest month-over-month increase since 2016. As long as mortgage rates remain low and home buyers continue to move out of the downtown core of U.S. cities, housing starts ought to continue to strengthen – and bolster homebuilders and other housing-related equities, too.

Here are five of the best housing market stocks to buy now amid this go-go environment for homes. While homebuilders are certainly part of the equation, a number of other related industries – from paint suppliers to DIY retailers and more – are enjoying a strong headwind currently.

Data is as of Aug. 11. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.

Lennar

Market value: $23.0 billion

Dividend yield: 0.7%

YTD return: 31.9%

Lennar (LEN), America's largest homebuilder by revenue, traded at a 52-week low of $25.42 during the mid-March market correction.

In the five months since, LEN has exploded by roughly 190% to all-time highs. For starters, it has managed to perform relatively well despite the novel coronavirus slowing its housing starts.

"New orders stalled significantly from mid-March to the end of April, driven by COVID-19 and the economic shutdown," Executive Chairman Stuart Miller said June 15 in the company's second-quarter report. "Accordingly, we slowed starts and land spend to preserve cash and protect our balance sheet.

"Business rebounded significantly in May, and by quarter's end, our total new orders declined by only 10%, and deliveries ended flat year-over-year."

Lennar's financial-services business hit an all-time high in the second quarter, too, with operating earnings of $150.6 million, more than double its profit a year earlier.

The homebuilder expects its Q3 2020 results to include new orders of at least 12,800 at an average sales price of $382,500 (at the midpoint of its June guidance), as well as a gross margin of at least 21.5%.

The National Association of Home Builders/Wells Fargo survey of builder confidence came in with a reading of 72 in July. Anything above 50 is considered a healthy and positive market. By comparison, the reading was 30 in April. This, as well as the other encouraging stats mentioned above, bode well for Lennar meeting its guidance, which in turn provides more confidence that LEN is among the best housing market stocks to buy now.

Home Depot

Market value: $295.7 billion

Dividend yield: 2.2%

YTD return: 25.9%

Home Depot (HD) has worked diligently throughout the COVID-19 pandemic to keep its staff and customers safe. It reduced its locations' operating hours so employees could clean and re-sanitize, and it limited the number of people in its 100,000-square-foot retail stores.

That meant longer waits for customers and lower revenues for HD, but it was the right thing to do to maintain a safe and sustainable business.

Home Depot has been making other improvements, too. The DIY retailer announced Aug. 4 that it would open three distribution centers in the Atlanta area over the next 18 months to speed up deliveries. This is part of a $1.2 billion investment over five years to improve its supply chain, which, like many businesses, has been greatly tested during the pandemic.

"We like to say that retail has changed more in the past four years than in our 40-year history," Stephanie Smith, Home Depot's senior vice president of supply chain, told CNBC. "COVID has even brought this more to light. Customers expect to shop whenever, wherever, however they want."

Home Depot would like to be able to provide same-day or next-day delivery to 90% of America. In December, it stated it provided one-day delivery to half of the U.S. population.

While HD is one of the most recognizable housing market stocks among regular consumers, the company generates approximately 45% of its sales from the home professional market. So anything it can do to keep this segment of its customer base happy, it will do.

Sherwin-Williams

Market value: $59.4 billion

Dividend yield: 0.8%

YTD return: 11.8%

CNBC's Jim Cramer recently commented that Sherwin-Williams (SHW), America's largest architectural paint provider, is one of the unexpected beneficiaries of the pandemic recession.

"In a normal recession, you don't bother fixing up your house because it's an expense. In a normal recession, houses lose value," Cramer said July 28. "Not this (recession), though. Home values keep rising as people flee the cities for suburbs and the exurbs."

Sherwin-Williams might indeed continue to be one of the best housing market stocks to buy. SHW is up 20% in the past three months to handily beat the S&P 500, while its 25.7% average annualized return over the past decade is more than 11 percentage points better than the broader market.

The company's second-quarter report included profits of $7.10 per share, which were up 8% year-over-year and $1.43 per share higher than analysts' consensus estimate. Thanks to a better mix of product sales, its gross margins improved by 330 basis points to 48%. That helped counter revenues that declined 5.6% to $4.6 billion because of the COVID-forced closure of most of its company-owned stores.

In fact, SHW raised its fiscal 2020 earnings forecast to a range of $19.21-$20.71 per share, up from previous guidance of $16.46-$18.46 per share.

CEO John Morikis said during Sherwin-Williams' Q2 2020 conference call at the end of July that the company's do-it-yourself business continued to do well during the pandemic as people carried out home-related projects.

"In DIY, our business continued to grow at an unprecedented pace and was robust throughout the quarter," Morikis said. "DIY demand surged throughout the quarter driven by consumers nesting and tackling home improvement projects during the pandemic. We generated strong double-digit growth by working closely with our retail customers to capture this demand, most notably Lowe's (LOW), our exclusive national home center partner."

Trex

Market value: $7.8 billion

Dividend yield: N/A

YTD return: 50.8%

You'd be hard-pressed to find a housing-related stock that's delivered a better annualized total return (price plus dividends) over the past 15 years than Trex (TREX).

Trex is a maker of composite decking and fencing that's made to last longer than traditional wood. And its annualized total return is 22.2%, almost three times the return of both its building products peers and well more than double the S&P 500 in that time frame.

One of the things that sets Trex apart from others in the building products industry is its commitment to environmental, social, and governance (ESG) practices. In August, the company released its 2019 ESG Report, and also launched the Trex ESG Hub – a dedicated section of the company website that discusses Trex's ESG priorities.

"Environmental stewardship is embedded in the Trex DNA, and we continually seek ways to strengthen our legacy," CEO Bryan Fairbanks said in the release. "Since inception, our decking products have been made with 95%+ recycled material content. Recycled consumer and industrial polyethylene film and reclaimed wood are the primary material sources for Trex decking."

Trex used more than 850 million pounds of recycled polyethylene film and reclaimed wood products to make its decking and fencing last year. At its manufacturing facilities in Virginia and Nevada, it introduced a closed-loop water recirculation system that recycles 99% of the plants' water.

The stock has grown because of more than just ESG practices, of course. Since going public in April 1999 at $10 per share, Trex's revenues have burst from $46.8 million in 1998 to $745.3 million in 2019, a compound annual growth rate of 14.1%. During the same span, operating incomes grew at a 14.5% annualized compound rate.

Doing well by doing good will continue to pay long-term dividends for its shareholders.

Alarm.com

Market value: $2.8 billion

Dividend yield: N/A

YTD return: 34.8%

The beauty of Alarm.com's (ALRM) cloud-based operating system is that it provides its 6.8 million residential and commercial subscribers with interactive security, video monitoring, intelligent automation, energy management and wellness solutions. However, it also provides the company's more than 9,000 service providers with a comprehensive set of connected solutions that are attractive to the end-user customer.

For example, in January 2019, ADT (ADT) launched ADT Command, the smart home touchpad that provides wireless control of your home or office's lights, heating and cooling, garage door, security system, and all the other things that keep your property safe and secure. As part of that launch, it also released ADT Control, the security company's app for providing wireless control.

All of this is possible because of Alarm.com's cloud-based platform.

"This has provided ADT a single platform with IoT application services for a range of market verticals including residential and multifamily housing, small business and commercial properties, and DIY," SecuritySales & Integration contributor Rodney Bosch recently wrote. "The expectation is the two companies will continue to support and expand the deployment of ADT Command for the foreseeable future."

As the Internet of Things (IoT) and connected living have taken off in recent years, so too has Alarm.com's business. Founded in 2000, it has grown organically and through strategic acquisitions such as its October 2019 purchase of OpenEye. OpenEye is a leading provider of cloud-based video surveillance solutions for the commercial market, with more than 14,000 business locations using its services.

Alarm.com went public in June 2015, selling 7 million shares at $14 in an offering that raised net proceeds of $86.5 million. In the five years since then, ALRM shares have appreciated by 314%.

As smart homes become more prevalent, the company's opportunity only grows larger, making ALRM one of the best housing market stocks to buy now.

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