Shares of homebuilders and building-products firms have languished amid a shift in purchasing behavior, high inflation, stretched household balance sheets and the transition to a post-COVID economy, according to Fidelity Portfolio Manager Gabriela Kelleher, who says the category nonetheless includes some solid businesses with a strong profit margin and the potential to achieve durable earnings over time.
“It's true that existing home sales remain near historic lows, but even if that trend continues and people stay in their homes longer, I think these companies could benefit from homeowners investing in their existing home,” says Kelleher, who manages Fidelity® Small Cap Value Fund (FCPVX).
She notes that the pandemic reshaped how people spend, tilting the scales toward services and away from tangible goods, a shift that, coupled with inflation and rising interest rates, has made big-ticket purchases – especially homes – considerably more expensive. As a result, housing-related companies, which thrive on these transactions, have felt the sting of this economic recalibration.
As manager of the value-focused portfolio since 2021, Kelleher favors companies with above-average quality characteristics, including good capital allocation, and that trade at a below-market multiple.
With shares of some firms having fallen as much as 40% recently, Kelleher likens the current state of investing in building-products stocks to a house in need of renovation: unappreciated based on a passing glance but brimming with potential for those with a vision.
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“I think these businesses’ long-term performance drivers are still intact, so I’ve been taking advantage of attractive valuations to increase exposure to these stocks,” she says.
Specifically, she sees two potential paths forward for building-products companies. “In one scenario, homeowners choose to stay put, investing in renovations and upgrades to enhance their living spaces,” Kelleher explains. “This trend could drive demand for cabinets, aggregates and other construction materials.”
On the other hand, even if people choose to stay in their homes longer, buying and selling activity could eventually pick up, sparking a wave of home-related projects. “Either way, housing-related businesses stand poised to benefit,” says Kelleher.
As an example, she cites a fairly new investment in Knife River Holding (KNF), a firm specializing in sand, gravel and crushed stone, all essential elements used in construction. She explains that she likes it for its competitive position, strong profit margin, earnings-growth potential and attractive valuation.
Similarly, a recently established stake in MasterBrand (MBC), a leading manufacturer of kitchen and bathroom cabinets, reflects Kelleher’s favorable view of its strong competitive position, new management team and the potential to boost its profit margin following the strategic acquisition of a larger rival.
Homebuilders, including fund holding KB Home (KBH), are feeling the pinch of high interest rates and low affordability, according to Kelleher, who sees this as an opportunity to potentially capitalize on valuations she is finding attractive.
Securities mentioned were fund investments as of March 31, its most recent holdings disclosure. For specific fund information, including full holdings, please click on the fund trading symbol above.
Gabriela Kelleher is a portfolio manager in the Equity division at Fidelity Investments.
In this role, Ms. Kelleher co-manages Fidelity and Fidelity Advisor Small Cap Value Fund.
Previously she was responsible for in-depth fundamental research and analysis across the small cap technology sector.
Prior to joining Fidelity in 2018, Ms. Kelleher was a senior equity analyst and vice president at Goldman Sachs, where she held various investment research roles. Most recently, she was responsible for industrials and consumer discretionary sector coverage across several small and small-mid capitalization strategies in asset management. She has been in the financial industry since 2007
Ms. Kelleher earned her bachelor of science degree in finance and CPA accounting from New York University’s Stern School of Business. She is also a CFA® charterholder.