The U.S. housing market recovery is gaining some traction, “Mad Money” host Jim Cramer says, at least if recent data are any indicators.

New home sales increased 3.3 percent to a seasonally adjusted 343,000-unit annual rate, the Commerce Department said last week. Compared to April last year, sales were up 9.9 percent.

Meanwhile, existing home sales rose 3.4 percent to an annual rate of 4.62 million units in April to their highest in almost two years, the National Association of Realtors reported last week. To Cramer, the results were nothing short of astonishing.

The Realtors association also indicated that “a diminishing share of foreclosed property sales is helping home values.” It also said “an acute shortage of inventory in certain markets is leading to multiple biddings and escalating price conditions,” with tight supply in Miami, Naples, Fla., Phoenix, and Orange County, Calif.

“Nothing speaks more strongly of a turn than when the hardest-hit areas are now not only back, but in incredible demand,” Cramer said.

Toll Brothers, the largest U.S. builder of luxury homes, also recently posted earnings that beat expectations. It delivered a second-quarter profit of 10 cents per share, above analyst estimates of 3 cents. The homebuilder saw a 14 percent jump in home deliveries thanks to a strong spring selling season, which is seen as a sign of a housing market recovery.

To play the potential housing turnaround, 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 With Reuters
Posted 30 May 2012

When this story was published, Cramer’s charitable trust owned Stanley Black & Decker.

Weyerhaeuser is the second-largest owner of timberland in the U.S. It currently 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 3.1 percent dividend yield. It’s cheap, too, trading at a 30 percent discount to its net asset value. Cramer recommends that investors consider buying shares at current levels, because by the time housing market does actually turnaround, it may be too late.

Cramer doesn’t recommend buying homebuilder stocks because they have already had a huge run. Instead, he prefers derivative housing recovery plays. For investors who have to own a homebuilder stock, he suggests “best of breed” homebuilder Toll Brothers.

Toll Brothers designs and builds single-family detached and attached homes in luxury residential communities. It 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 pinches 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.

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.

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. Its stock is cheap, too, selling for 12 times forward earnings estimates, with an 18 percent long-term growth rate. It also pays a 2.4 percent dividend yield, leading Cramer to call it a “raging buy.”

Pier 1 Imports operates as an importer and specialty retailer of imported decorative home furnishings and gifts. Cramer sees it as a play on the housing recovery, because when people buy a home, they’re going to want to decorate it with the furnishings and decor Pier 1 sells.

The company is the largest retailer of decorative home furnishings and gifts in North America, too. Over the past few years, Cramer said, it has pulled off “one of the greatest comeback stores of our era.”

In 2009, Pier 1 was on the verge of filing for bankruptcy protection and its stock was trading at just 10 cents a share, Cramer noted. Under the leadership of CEO Alex Smith, though, things turned around. Today, Pier 1’s stock is trading at around $16 a share — that’s about a 16,000 percent gain from the stock’s bottom.

Cramer thinks Pier 1’s stock could push higher, too, as housing continues to turn around. It pays a meager dividend yield of 1 percent, but that’s better than nothing.

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 2.4 percent dividend yield. It’s not stellar, he admits, but it’s a safe yield even if housing stays flat.

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.

As the nation’s No. 1 home improvement retailer, Home Depot will likely experience tailwinds from the housing recovery, Cramer says.

From lumber to light fixtures, paint and hand tools, Home Depot sells most everything people need to maintain and improve their homes. The company operates more than 2,000 home improvement stores across the U.S.

Additionally, Cramer likes that Home Depot’s stock pays a 2.4 percent dividend yield.

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 aging homes.

At the moment, Fortune’s stock is relatively close to its 52-week high. It doesn’t seem cheap because it’s selling for 22.6 times earnings, but considering its 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 before buying shares.