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Sell Home Depot Stock, Buy Trex and Lumber Liquidators

By Rick Munarriz - Apr 25, 2013 at 11:12AM

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Trex and Lumber Liquidators are on fire. Home Depot and rival Lowe's are home improvement slowpokes.

Shares of Lumber Liquidators (LL -2.67%) soared 12% yesterday -- and have continued to hit new all-time highs this morning -- after posting blowout quarterly results.

The hardwood flooring retailer saw net sales soar 22.5%, to $230.4 million during the first quarter, fueled by a 15.2% spike in comps. Margins expanded, and profitability nearly doubled, to $0.57 a share. Wall Street didn't have a clue. The pros were projecting a profit of $0.42 a share on $215.5 million in revenue.

The market should be used to this by now: Lumber Liquidators has beaten Wall Street's bottom-line targets by 16% or better every quarter for the past year. The chain of nearly 300 stores that specializes in hardwood planks and other flooring options raised its guidance, but we know the drill. Lumber Liquidators is going to make analysts look silly again in three months.

The report naturally bodes well for Trex (TREX -2.02%). The leading provider of wood-alternative decking posts next week, and what's good for one has been good for the other. Trex has also blasted through Wall Street estimates, beating quarterly profit targets by a double-digit percentage margin every single period over the past year.

It's easy to see the appeal to Lumber Liquidators and Trex. They are thinking-investor plays on the housing market's recovery. As real estate prices rise, and homeowners discover that they finally have equity in their homes, it's easy to take on the dream to upgrade a property's flooring, or extend a home's living space by building an outdoor patio with weather-resistant materials.

Most investors will ignore Trex and Lumber Liquidators. They'll turn to Home Depot (HD -0.20%) and Lowe's (LOW -1.69%) as the big plays on home improvement, and that could be a mistake. Even in this market recovery, analysts see Home Depot and Lowe's growing revenue at a 3% to 4% clip this year and next year. Lumber Liquidators and Trex are expected to expand their sales three to four times faster.

It's true that Lumber Liquidators and Trex aren't as cheap as they used to be, but their near-term prospects are brighter than the superstore chains that aren't exactly bargains, either.

Home Depot stock is trading for 21 times this year's earnings. Faster-growing Trex is fetching just 18 times this year's projected profitability, and that's in line with the multiple at Lowe's. Lumber Liquidators commands the richest premium at nearly 40 times the midpoint of its new bottom-line guidance for this year.

The valuations are lofty across all four players, but at a time when the market is dishing out healthy premiums, the smarter bet has to be the companies that are growing faster. Trex and Lumber Liquidators are the ones to watch here.

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Stocks Mentioned

The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$287.19 (-0.20%) $0.57
Lumber Liquidators Holdings, Inc. Stock Quote
Lumber Liquidators Holdings, Inc.
LL
$10.95 (-2.67%) $0.30
Trex Company, Inc. Stock Quote
Trex Company, Inc.
TREX
$60.71 (-2.02%) $-1.25
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
LOW
$184.69 (-1.69%) $-3.17

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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