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The U.S. housing market has shown strong signs of bottoming and could soon turn around, “Mad Money” host Jim Cramer says, at least if recent housing data and bullish comments from prominent businessmen are any indicator.
Take pending home sales, for example, which recently hit a 19-month high. The National Association of Realtors’ existing home sales index rose by 7.3 percent from October to November, even though industry experts had expected an increase of just 1 percent.
Jack Welch, meanwhile, has joined the group of notable businessmen who think the housing market is looking up. Earlier this month, the former General Electric chairman said a combination of low prices and record-low interest rates have helped the battered real estate market hit bottom and get ready to rebound, perhaps even stronger than many economists expect.
"Housing has pretty well bottomed and rental prices are going up. Vacancies are almost nonexistent," Welch said. "So you've got a lot of forces driving toward the housing market. Prices are down, interest rates are down, the affordability index is good. ... We think it could be a blowout. Housing could be really good based on all the dynamics that are out there."
To play the potential housing turn around, though, Cramer doesn’t recommend buying homebuilder stocks because they have already had a huge run. Instead, he’s attracted to home improvement plays that pay you to wait for the rebound to kick into full gear. Read on for his preferred plays.
By Drew Sandholm
Posted 20 January 2012
When this story was published, Cramer’s charitable trust owned Weyerhaeuser; General Electric owns 49 percent of NBCUniversal, which operates CNBC.
Based in New Britain, Conn., Stanley Black & Decker is the largest maker of hand tools, power tools, and related accessories in the U.S. The company enjoys a 40 percent market share in tools, making it the “undisputed king of the market,” Cramer said.
While Stanley Black & Decker is profiting from a surge in spending at home improvement retailers Lowe’s and Home Depot, each of which accounts for more than 10 percent of Stanley’s sales, the company’s shares are actually down 1 percent in the last six months. Cramer thinks that’s nuts and certainly won’t last for long. Its stock is cheap, selling for 12 times forward earnings estimates, with an 18 percent long-term growth rate. It also pays a 2.3 percent dividend yield, leading Cramer to call it a “raging buy.”
Headquartered in Federal Way, Wash., Weyerhaeuser is the second-largest owner of timberland in the U.S. It manages roughly 20.5 million acres of forests in which it grows and harvests trees for use as lumber, other wood and building products, as well as pulp and paper. To Cramer, Weyerhaeuser is more profitable and productive than its competitors. He thinks its successes are, in a large part, due to its fabulous management team.
The timber company’s stock sports a 3 percent dividend yield right now. It’s cheap, too, trading at a 30 percent discount to its net asset value. He recommends investors consider buying shares at current levels, because by the time housing does actually turn around, it may be too late.
Masco's largest end market isn’t new building, but the repair and remodeling market, accounting for 46 percent of its sales. That's good, Cramer said, because unlike with new construction, investors don’t need to wait for a turnaround in housing as there already is a surge in remodeling.
Cramer also likes this stock’s 2.5 percent dividend yield. It’s not stellar, he admits, but it’s safe, even if housing stays flat in the year ahead.
Masco’s stock currently sells for 38 times this year’s earnings estimates, a sky-high multiple, especially for a company with a 15 percent long-term growth rate. With this kind of cyclical stock, Cramer said, it’s best to buy when the price-to-earnings multiple is at its highest, because that means earnings are depressed. As business improves and earnings increase, the stock will look cheaper, but it will only appear to be less expensive. So for the best value, Cramer thinks now is the time to buy Masco.
Based in Deerfield, Ill., Fortune Brands Home & Security makes kitchen and bath cabinetry, plumbing, windows, doors, and more. Last year, new construction drove 20 percent of its sales, while the repair and remodel markets accounted for 35 percent. So even if housing doesn’t bounce back right away, Cramer thinks Fortune will still profit from people fixing up their ever-aging homes.
At the moment, Fortune’s stock is close to its 52-week high. It doesn’t seem cheap because it is selling for 22.6 times earnings, but when you consider it has a 22 percent long-term growth rate, it seems like a pretty good deal. Cramer doesn’t recommend investors chase this stock, however. Instead, he suggests waiting for a pullback.
Cramer doesn’t recommend buying homebuilder stocks because they have already had a huge run. Instead, he prefers derivative housing recovery plays. But for investors who have to own a homebuilder stock, he suggests “best of breed” Toll Brothers.
Based in Horsham, Pa., Toll Brothers designs and builds single-family detached and attached homes in luxury residential communities. Toll Brothers is also involved in building or converting existing rental apartment buildings into high-rise, mid-rise, and low-rise luxury homes.
Toll Brothers is not only profiting from a potential housing turnaround, but benefits from yet another trend: a thriving upper class. Unlike fast-growing countries, such as Brazil, China, and India, the U.S. middle class is evaporating. In turn, the rich are spending more, while everyone else is pinching pennies, Cramer said. In this environment, Toll Brothers could continue to profit. Again, Cramer would rather buy one of the indirect housing recovery plays before picking up shares of this homebuilder.