2 Consumer Stocks to Play a Housing Recovery

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Housing might be showing signs of life this summer. This week, Corelogic reported the percentage of underwater mortgages in the country dropped to under a quarter of all mortgages. About 700,000 households now have turned to from negative equity to having enough to cover their mortgage debt, a sign that home prices, and their owners, are recovering.  Also, the lastest Case-Shiller index reading did find home prices turned up slightly in April, after seven months of drops. New-home sales tallied by the government were up almost 20% in May above a year ago.

We're not out of the woods, though: RealtyTrac says over a million properties are still in foreclosure in this country, and there's backlog that's not even close to catching up to the number of delinquent households. That's a big drag on the market, so the Fools are right in staying bearish on the stocks of home builders such as Toll Brothers (NYSE: TOL  ) and Beazer Homes (NYSE: BZH  ) -- giving them CAPS ratings of two stars and one, respectively.

But homeowners are starting to put money back into their homes. A recent survey found seven out of 10 homeowners were planning some kind of remodeling project this year, either painting (49%), landscaping (47%), or remodeling a room (29%). Also, the Commerce Department's retail sales tally for June found furniture stores sales in May were up 9.4% year-over-year.

So if you're looking for a back-door way to play to Americans' house envy in this lame recovery, try companies that will get a bump as households look to spiff up their homes, such as furniture stores and manufacturers of products fit for DIY homeowners.

Stanley Black & Decker (NYSE: SWK  ) , the tool manufacturer, only gets a three-star CAPS rating and its stock has gotten smacked down lately, down over 10% for the year and way off its $81.90 52-week high. The tough housing market added to the drag of Stanley's acquisition of Black & Decker in 2010, and it didn't help matters when it fell short of estimates in the last quarter. The company is reporting second-quarter results on July 18, and it's expected to post earnings of $1.53 per share, up from $1.46 last year. Combined with the good signs on housing, an earnings beat will go a long way to reclaiming the lost ground.

Fitch recently gave the stock a vote of confidence when it affirmed its A- rating, saying the company has good free cash flow, shrinking leverage, and is managing acquisitions well.

Fortune Brands & Home Security (NYSE: FBHS  ) , a maker of cabinetry, plumbing supplies and windows, gets a five-star CAPS rating, but its following is small, so it's hard to draw conclusions from that. Some have noticed that Pershing Square's Bill Ackman made a big bet on Fortune Brands. Fellow Fool Michael Lewis noted here it's a hedged bet: If housing recovers, Fortune brand Simonton will sell more windows for new homes and if not, homeowners will be spiffing up old bathrooms with Moen faucets.

However, the numbers do look good for the company. Sales in the last quarter were up 12% and management has forecast they will rise in the high-single digit percentages for the year as the company gains market share.  And management's guidance is calling for earnings per share to come in at $0.77 to $0.87 this year, up about 37% at the midpoint from 2011. At the most recent call with analysts, CEO Christopher Klein said the company is "contemplating" share repurchases and dividends as possible uses for the cash it's generating.

Both Fortune Brands and Stanley are pursuing sales overseas to offset the iffy recovery in the U.S. market. But if you want to see a rundown of three major U.S. companies set to profit off of the emerging markets abroad, check out The Motley Fool's report: "3 American Companies Set to Dominate the World." To download your free copy, click here.

Fool contributor Mercedes Cardona does not own shares in any of the companies mentioned in this article. Follow her on Twitter and on her website.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Related Tickers

10/25/2016 4:02 PM
FBHS $52.31 Down -3.06 -5.53%
Fortune Brands Hom… CAPS Rating: ***
BZH $10.86 Down -0.41 -3.64%
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SWK $117.02 Down -2.50 -2.09%
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