2 Home-Improvement Stocks to Rebuild Your Portfolio

It's time to start thinking about home improvement again -- both as a homeowner and an investor.

Shares of Lumber Liquidators (NYSE: LL  ) soared 27% yesterday after posting better-than-expected quarterly results, and this morning Trex (Nasdaq: TREX  ) is out with a robust report as well.

Lumber Liquidators and Trex aren't obviously the first names that investors bring up when they think about home improvement. It's Home Depot (NYSE: HD  ) -- the superstore chain with its army of orange aprons -- that the market typically associates with the industry.

However, it's clear that not all categories across the Home Depot aisles will bounce back at the same time. Home prices appear to be bottoming out, but the first wave of beneficiaries will be the specialists dedicated to sprucing up existing homes. It may take years before real estate developers truly bounce back with new construction. The climate of stable real estate prices, for now, will benefit the companies that offer homeowners simple improvement projects.

Now that there are fewer reasons to fear a mortgage taking a home's value underwater, it's easier to justify replacing that shag carpeting in the living room with stylish planks of hardwood or finally making the most of the backyard by replacing that rotting deck.

Hardwood flooring retailer Lumber Liquidators and wood-alternative decking leader Trex are making the most of those baby steps, and the popularity of their specialties is obvious now.

Lumber Liquidators saw net sales spike 20% to $210 million in its latest quarter. Expansion of its small-box stores helped, but the real driver here was a 12.4% pop in same-store sales. Profitability more than doubled to $0.43 a share, well ahead of the $0.29 a share that the market was expecting.

Trex's report this morning was also encouraging, with revenue matching Lumber Liquidators' 20% advance. Analysts were only expecting Trex's top line to climb 16% during the second quarter. Profitability quadrupled to $0.48 a share, fueled by a healthy expansion in gross margins. Back out a small severance charge and an increase in warranty reserve for a problem at a plant that was rectified five years ago, and Trex's adjusted net income clocked in at $0.59 a share. Wall Street was settling for a profit of $0.53 a share.

The strong results naturally bode well ahead of next month's reports out of Lowe's (NYSE: LOW  ) and Home Depot. If folks are installing new hardwood floors or going with pricier yet longer-lasting composite decking for their patio needs, obviously there are more residential improvement projects being undertaken this year. However, the early stages of this recovery make the niche specialists the smarter plays.

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The Motley Fool owns shares of Lumber Liquidators Holdings. Motley Fool newsletter services have recommended buying shares of Lumber Liquidators Holdings and The Home Depot. Motley Fool newsletter services have recommended writing covered calls on Lowe's. The Motley Fool has a disclosure policy. 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.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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