Overleveraged homeowners combined with falling home prices created a perfect storm that caused untold financial damage to many who depended on their home value for a savings or retirement plan.
But this storm appears to have finally blown itself out and now the housing market is finally recovering.
Beginning home construction jumped to a four-year high in September to an 872,000 annual rate. This month, the National Association of Home Builders/Wells Fargo builder sentiment index increased to 41, a level not recorded since June 2006.
Not only this, but home prices are starting to slowly climb upwards. Home values in 20 cities increased 2% in the year ending in August, according to the latest S&P/Case-Shiller Home Price Index numbers. In fact, the latest economic numbers clearly indicate that home prices recently reached the highest level in more than two years.
It's clear these figures all point toward a continuing rebound in housing. Provided these facts, how can regular investors like you and me best profit from the rebounding housing market?
The obvious and most popular way is by purchasing individual homebuilder stocks or the exchange-traded fund (ETF) SPDR S&P Homebuilders (NYSE: XHB). These two forms of investments have been in a solid uptrend since June. Take a look at the chart below showing the bullish trend for SHB and two homebuilders, Lennar Corp. (NYSE: LEN) and KB Home (NYSE: KHB)...
But when it comes to housing rebound, I think the wisest way to profit is to buy stocks that have a direct link to housing, but that are not actual homebuilders -- I am talking about stocks like Lowes (NYSE: LOW) and Home Depot (NYSE: HD).
These "ride-along" stocks stand to profit from the entire rebound -- not just new construction -- since the housing rebound is bringing more home investors and rehabbers into the market. Just look at the numerous reality TV shows dedicated to these entrepreneurs.
Out of all the possible ride-along stocks I've researched, I like Fortune Brands Home & Security (NYSE: FBHS) the most. The company was spun off from Fortune Brands (NYSE: FO) last year as a provider of crucial home and security products for residential home repair, remodeling, new construction, storage and security. Two of the brands you may be familiar with are Moen faucets and Master Lock.
And because it creates products that are a critical component of residential real estate, the stock is an ideal candidate for a real estate recovery portfolio. It stands to profit from all aspects of the housing recovery since its products are in high demand across the board in the real estate business.
Not only is Fortune Brands Home & Security ideally positioned to continue to profit from the housing recovery, it is also a spin-off stock. If you've read my articles, then you know I love spinoffs. I basically like spinoffs because they tend to outperform their parent company and peers.
Recently-released third-quarter earnings confirm spinning its home and security business off was a smart move. Revenue increased 7% to more than $909 million, crushing estimates by more than $10 million. Net income rocketed from $2.2 million to $40 million year-over-year. These extreme growth numbers are the result of a 6% sales increase in kitchen/bath cabinets and a 12% up move in plumbing supplies sales.
Management has a very optimistic outlook, too. It has increased its yearly earnings forecast to between 86 cents and 88 cents a share, beating the consensus estimate of 83 cents per share.
This is one company that will likely continue to rake in the profits due to its multi-prong customer base, unlike the single-prong base of new construction-driven homebuilders.
Risks to Consider: Some economists believe that housing is still far from a bottom. Citing statistics like "ghost inventory" numbers, these bearish pundits build a compelling case. But the market itself is painting a far more bullish story. While homebuilders could feel another downturn severely, the ride-along stocks mentioned above have a much better chance of weathering future storms due to demand in all aspects of the housing market. Regardless of your opinion, always be certain to use stops, diversify and position size properly when investing in the stock market.
Action to Take --> Technically, shares have been in a solid uptrend since the first week of August, topping out at just over $30. The 50-day simple moving average, in the $27 range, is acting as price support. I like this stock at the current level with stops at $26. My target price is $35 within the next 12 months.