4 of 2013’s Fastest-Growing Small Caps Are in This Hated Sector
With the economy expected to grow at a tepid pace in 2013, most small-cap companies will be glad to simply eke out modest sales gains. Indeed, nearly half the companies in the S&P 600 (small-cap index) are expected to see sales grow less than 5% — or outright shrink — and another 200 firms are only expected to see sales growth in the 5 to 10% range.
Yet there is one segment of the U.S. economy that is expected to break out in 2013 — housing. As a result, a number of industry players are expected to boost sales by 30% or more in 2013 and perhaps grow at a still-solid clip in 2014 as well.
Here are four small-cap housing-related stocks — that should be on your radar as we head into 2013.
1. Meritage (NYSE: MTH) and Ryland (NYSE: RYL) — a pair of regional homebuilders
Both of these firms are expected to boost sales roughly 35% in 2013 (to about $1.6 or $1.7 billion) as they use the improving housing data of 2012 to embark on more aggressive new-home construction plans in 2013. In a recent note to clients, Goldman Sachs singled out these two firms as being emblematic of a new industry trend: “In stark contrast to previous recoveries builders are being more disciplined about driver margins and returns. Pulte (NYSE: PHM), Meritage and Ryland highlighted on earnings calls that they would rather see price increases over and above incremental unit sales.”
This means they are unlikely to enter into a manic phase of building that merely serves up the next industry hangover. To be sure, neither of these stocks are overly cheap, trading between 15 and 20 times projected 2013 profits. But if you believe the housing recovery will have legs into the middle of the decade, then this is a good time as any to jump in.
2. Forestar Realty (NYSE: FOR)
At first blush, this may not seem like a housing play. After all, this company owns vast swaths of land across seven states and, in recent years, has been allowing miners to simply exploit the land for minerals or produce fibers from its trees.
But management has always noted its real estate holdings consist of prime residential locations, and in the right housing environment, Forestar aims to fetch top dollar for its land to real estate developers. Indeed analysts say that will be the case in 2013, so asset sales should fuel an 84% jump in sales to $262 million.
Back before the housing market tanked, this stock traded for $25 a share. Shares, now at $15, don’t appear to reflect the value yet to be unlocked in the balance sheet as real estate prices strengthen.
3. Eagle Materials (NYSE: EXP)
This company provides a wide range of materials that are used in construction, from wallboard to cement to concrete. You can see just how cyclical this business can be by scanning the past decade’s income statements. From 2004 to 2007, Eagle saw sales soar from $503 million in fiscal (March) 2004 to $922 million in fiscal 2007, coinciding with the end of the housing boom. By fiscal 2011, they had fallen to just $462 million, leading to earnings of just 34 cents per share — less than a tenth of what the company earned in fiscal 2007.
An upturn appears to be at hand: Sales rose a modest 7% in fiscal 2012 to $495 million, are on track to rise 30% this year (to roughly $645 million) and analysts say sales could surge by nearly 40% in the fiscal year that begins next April to about $900 million — not far from where they were back in 2007. Per-share profits are also expected to rise at a fast clip.
Risks to Consider: The housing market will continue to strengthen — if — Washington doesn’t derail the U.S. economy with its current shenanigans.
Action to Take –> The housing market appears to be rebounding and when the phase of new construction begins, it can last for several years for this industry. This means so results in 2015 and 2016 could be even more robust than the numbers cited above. Though many housing-related stocks have moved up off of their lows, they don’t nearly reflect the peak of the cycle — a key consideration if you are a long-term investor.