Do iRobot or D. R. Horton Belong in Your Portfolio?

There are reasons to be bullish about robots and homebuilding.

Jul 3, 2014 at 12:15PM

Roomba
Source: iRobot.com

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some home-building companies to your portfolio but don't have the time or expertise to hand-pick a few, the SPDR S&P Homebuilders ETF (NYSEMKT:XHB) could save you a lot of trouble. Instead of trying to figure out which stocks will perform best, you can use this exchange-traded fund to invest in lots of companies of interest simultaneously.

Why home builders and home-related companies?
There's money to be made in home building and related companies, but it's a cyclical business, so you need to assess the state of the market. There has been a long housing slump, and the National Association of Home Builders' confidence index has reflected more pessimism than optimism lately, but it did register an uptick last month. Inventory levels have also trended up lately, but they remain on the low side, suggesting that more new houses will be welcome in the market. (Low inventory levels can also mean higher prices for home builders' new homes.)

This ETF is worth a look for those interested in the sector. ETFs often sport lower expense ratios than their mutual fund cousins, and this ETF is no exception, with its annual fee only 0.35%, less than the iShares US Home Construction ETF's 0.46%. Future performance is unknown, but it has outperformed the world market over the past three and five years.

A closer look at some components
On your own you might not have selected D. R. Horton (NYSE:DHI) or iRobot Corporation (NASDAQ:IRBT) as home-building companies for your portfolio, but this ETF included them among its 35-some holdings. While iRobot is certainly home-related, it's much less a home-building company than others in the ETF. Still, it was recently this ETF's top holding.

iRobot Corporation
iRobot has been serving long-term investors well, with its stock averaging annual growth of 26.5% over the past five years. It has only gained about 7% over the past year, though. Is something wrong? Well, its last quarter featured estimate-topping revenue and earnings, with its consumer-robots (that vacuum, mop, and scrub floors, and that clean pools and gutters) posting 17% sales growth year over year. All is not completely rosy, though. iRobot also sells robots for military use, and that business has shrunk recently, due to cutbacks in defense spending. Its last quarter's earnings were lower than year-ago levels, and management didn't forecast brisk growth.

The company is shifting gears a bit, targeting consumers more, while also developing offerings for various industries and niches, such as telemedicine and virtual conferencing. It's also growing internationally, such as in Asia. Some see a business catalyst in home sales growth among younger buyers, who tend to be more interested in technology such as robots. iRobot's near-term future may be bumpy, but it's a rather successful pure play in robotics, a field likely to keep growing. Its stock doesn't seem very cheap right now, but long-term risk-takers might want to add it to a watch list, waiting for a pullback.

D. R. Horton,
You may or may not know D. R. Horton's name, but it's the nation's biggest home builder and operates in 27 states. It's rolling out a new line of "Express" Homes, which sport few frills and are designed for entry-level buyers, and that has many folks hopeful, as these homes could reach those who have felt priced out of the market. The company is not limiting itself to any customer segment, though, as it rolled out its upscale, expensive "Emerald" homes last year. (They already generate about 6% of revenue.)

The stock's P/E near 16 is about half its five-year average of 32, suggesting that it's attractively priced. The company's prospects seem solid, too, as America is putting the last recession behind it and unemployment is dropping, both factors that can spur home sales.

The big picture
It makes sense to consider adding some home-building companies to your portfolio. You can do so easily via an ETF. Alternatively, you might investigate an ETF focused on home-building companies and then cherry-pick from its holdings after doing some research on your own.

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Selena Maranjian owns shares of iRobot. The Motley Fool recommends iRobot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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