The housing and real estate industries have been pressured by high interest rates. Less than three months ago, the 30-year mortgage rate was approaching 8% -- its highest level in over 20 years. A high mortgage rate prices out a lot of buyers. But rates have cooled since then, and the 30-year is back down to 6.7% at the time of this writing.
2024 could be a year when the Federal Reserve begins cutting rates instead of raising them, which could help consumer spending and, in turn, the housing market. Here's why Home Depot (HD 0.94%), Owens Corning (OC 2.10%), and Enphase Energy (ENPH 3.80%) could be three top stocks to play a rebound in the housing market.
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A straightforward bet on economic growth
Daniel Foelber (Home Depot): Home Depot has been a red-hot stock, gaining just shy of 20% over the last three months. Home Depot benefits big time when folks invest in their homes, from improvement projects to new builds. Beyond that industry, Home Depot is a bet on the broader economy.
When times are good, people may be more inclined to pay for a long-overdue renovation, fix the pipes, build a deck, etc. Whereas if consumer spending is tight, households will get defensive and put off projects.
Home Depot's profit surged during the worst of the COVID-19 pandemic as low interest rates paired with people stuck at home opened the floodgates on DIY projects. Profits have understandably pulled back since then. But remarkably, Home Depot is still making much more than it was pre-pandemic.
HD Net Income (TTM) data by YCharts
The last year of Home Depot's earnings was particularly impressive, as the company has been booking big gains in a challenging business environment.
Even after the recent three-month rally, Home Depot stock still sports a 22.8 price-to-earnings ratio -- not bad for a company that could be due for further earnings growth in the years to come.
What's more, Home Depot has a dividend yield of 2.3%, which provides an incentive to hold the stock through periods of volatility.
Add it all up, and Home Depot stands out as one of the easiest ways to play a rebound in housing and growth in the broader economy.
An excellent value option in the housing sector
Lee Samaha (Owens Corning): With 70% of its revenue coming from the U.S. and 73% from roofing materials and insulation, Owens Corning has heavy exposure to the U.S. housing market. Major storms and inclement weather are drivers of roofing revenue, which can lead to variable performance from year to year.
However, most of its roofing revenue comes from repair & remodeling activity (55% of roofing revenue in 2022) and new housing construction (18%). While repair & remodeling revenue is relatively stable, it still has a variable element dictated by the market for existing home sales, homeowner's financial conditions, and how they feel about the value of their properties. These factors have acted as headwinds in 2023.
The insulation business is also somewhat tied to the housing market. Management noted it expected "lower demand in the quarter versus [the] prior year as we continue to track closer to lagged housing starts" when discussing the fourth-quarter outlook. Similarly, the composites business faces the chill winds of slower economic growth.
All told, Owens Corning is facing near-term headwinds, but it's nothing that can't be turned around with a more benign interest rate environment. Moreover, the stock trades in just 10.7 times the estimated 2023 earnings. That's too cheap for a stock with plenty of upside potential if the housing market recovers in 2024.
An improving housing market could erase the clouds hanging around Enphase Energy
Scott Levine (Enphase Energy): There's a wide variety of stocks that could benefit from a boom in the housing market, but one stock that may have fallen off investors' radars is Enphase Energy. After a thoroughly disappointing year in which Enphase's stock plunged more than 50%, shares haven't reversed their trajectory in 2024, falling almost 20% since the start of the year. But just because a stock is down doesn't mean it's out. This solar power leader is poised to prosper from a better housing market, making it a solid choice for patient investors.
Looking at the solar industry writ large, investors will find that there are encouraging signs. In early December, the Solar Energy Industries Association (SEIA) reported that the U.S. residential solar market (Enphase's bread and butter) installed a record 210,000 systems in the third quarter. With the Federal Reserve planning to cut interest rates in 2024, the solar residential market will likely continue to grow since high interest rates can deter homeowners from adding solar power systems to their homes.
While Enphase was initially dedicated to microinverters (a valuable component of solar power systems), the company has developed a variety of offerings for residential customers, including home energy management solutions, electric vehicle charging, and energy storage, to name a few. This provides ample opportunity for growth. According to management, the company's serviceable addressable market will grow to $23 billion in 2025.
