Is a Housing Rebound Building These Stocks Up to New Highs?

If housing is on the rebound, the home-improvement sector could have told you months ago. Many stocks in the sector are at or near 52-week highs, including industry bellwether Home Depot (NYSE: HD  ) . Paint-focused companies are a high-flying bunch as well -- Sherwin-Williams (NYSE: SHW  ) just hit a new 52-week high, and both PPG Industries (NYSE: PPG  ) , and Valspar (NYSE: VAL  ) can reach that same point with very little growth. Let's take a look at what's driving this growth, so we can find out if there's clear sailing ahead for your favorite stocks.

How it got here
Let's start with Home Depot. My fellow Fool Sean Williams covered Home Depot's 52-week high earlier this month, noting impressive growth in homebuilding and remodeling putting wind in the company's sails (and sales).

Sherwin-Williams has been staking out highs of its own behind a combination of impressive earnings and exuberant investors, who've bid the company's P/E multiple up to new highs as well.

SHW Total Return Price Chart

SHW Total Return Price data by YCharts

The only underperformer in this group is Lowe's (NYSE: LOW  ) , which has been fighting a losing slow-motion home-improvement warehouse war with Home Depot.

Let's dig a little deeper into the numbers to find out if this growth is justified across the board, or if some stocks are getting a bit overheated.

What you need to know
What you'll notice right away is that nearly every company (except PPG) currently trades at a premium to its five-year average P/E ratio, indicating above-average market enthusiasm:

Company

P/E Ratio

5-Year Average P/E

Price to Free Cash Flow

Projected Growth Rate (2013)

Home Depot 20.2 16.5 23.2 13.9%
Lowe's 18.2 15.9 23.2 22.8%
Sherwin-Williams 28.1 16.8 21.8 19.2%
PPG Industries 18.7 18.7 13.2 1.4%
Valspar N/M 15.7 17.9 12.8%

Sources: Yahoo! Finance and Wolfram Alpha. N/M = not material because of negative results.

PPG's substandard forward growth rate explains why its P/E hasn't grown. Valspar's nonexistent P/E should go back to normal once the effects of a one-time charge move off its trailing-12-month results at the end of this year. Sherwin-Williams' current position seems riskiest, as it's got the widest gap between its current and five-year average P/Es. That gap should narrow if its actual 2013 growth rate can beat the Street's optimistic assessment -- unless investors keep piling in, which would create a risky situation if beaten-down homeowners get hit with an economic double whammy next year.

What's next?
What's next for the home improvement sector? We'll have to see how the economy shapes up, both now and beyond the upcoming presidential election. The housing sector is still down in the dumps, with a significant number of homes sold as foreclosures. However, there may be signs (14 of them, to be exact) that housing might have finally bottomed out and is now set for a long-awaited recovery. If that's the case, all of these stocks should be able to sustain further growth in the years ahead.

Interested in tracking this sector? Add these five stocks to your watchlist now, for all the news we Fools can find, delivered to your inbox as it happens. If you're looking to invest in other industries that could see long-term gains after the election, the Fool's got a free report for you. It details four more great stocks poised to skyrocket in 2013, so get the information you need now, at no cost, before it's too late.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.

Motley Fool newsletter services have recommended buying shares of Sherwin-Williams and Home Depot. Motley Fool newsletter services have also 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.


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