There’s a Bright Spot in Home Improvement

While the housing market may be as flat as it’s ever been, another key component of residential investment has been rising: home improvement. More owners are now willing to reinvest in their current residences rather than shell out money for a new home.

In January, the Buildfax Remodeling Index rose 22% year over year, to its highest January level since the index was founded in 2004. It was the 15th straight month of increases, so there’s a clear trend playing out. The gain has been broad-based, with every U.S. region posting a year-over-year gain in January. Home remodeling spending is estimated to grow 9.1% in the first quarter.

Numbers like those continue to bode well for big-box home improvement retailers such as Home Depot (NYSE: HD  ) and Lowe’s (NYSE: LOW  ) , as well as more focused competitors such as Lumber Liquidators (NYSE: LL  ) . Maintenance and repairs account for about 40% of Home Depot’s sales. Home Depot just notched its first annual sales gain since the fiscal year ended January 2007, and Lowe’s just exceeded its pre-recession annual sales record. Seasonal hiring at Lowe’s is up 15% year over year, and my own channel checks at Home Depot (i.e., I shopped there last weekend) suggest that business is a lot more robust than it has been in recent months.

The emphasis on home improvement should help bolster the bottom line at Masco (NYSE: MAS  ) , which reported a net loss in the last three years and has seen operating profit fall for each of the past five years. Fortune Brands (NYSE: FO  ) might also see a bump. While sales at Fortune’s spirits division remained robust during the recession, its home and security division has seen sales dive 31% since their 2006 high. And there’s nothing like a good coat of paint to make things look new again, so expect paint players such as Sherwin-Williams (NYSE: SHW  ) , which has performed solidly during the tough times, to buck up.

Whether the stocks of these players follow suit is another question entirely. Home Depot, Lowe’s, Fortune, and Sherwin-Williams trade in the 19-20 P/E range, while the faster-growing Lumber Liquidators is priced at 25 times trailing earnings. Masco’s loss for the year makes its P/E meaningless.

So what’s the best play in the home improvement space? Let me know in the comments below.

Jim Royal, Ph.D., does not own shares of any company mentioned here. Home Depot and Lowe's are Motley Fool Inside Value picks. Lumber Liquidators is a Motley Fool Rule Breakers recommendation. Fortune Brands and Sherwin-Williams are Motley Fool Stock Advisor choices. Masco is a Motley Fool Income Investor recommendation. Motley Fool Options has recommended writing covered calls on Lowe's. The Fool owns shares of Lumber Liquidators. 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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