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Will the Top Housing Stocks of 2014 Stay Strong in 2015?

By Matthew Frankel, CFP® – Dec 31, 2014 at 7:00AM

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Some homebuilders and home improvement retailers performed very well in 2014. Should we expect a repeat?

The iShares U.S. Home Construction ETF (ITB 5.04%) hasn't produced stellar results in 2014, with shares of the fund up 2% for the year, severely lagging the S&P 500's gain of nearly 11%. This is mainly due to poor performance by many of the big homebuilders, such as Beazer Homes (BZH 4.99%), which is down by 26% for the year, and Toll Brothers (TOL 5.44%), down by more than 12% year to date.

Source: Wikimedia Commons user Rishichhibber.

The winners circle
Some companies in the sector, however, have done quite well. For example, homebuilders D.R. Horton (DHI 5.64%) and Lennar (LEN 5.46%) have both risen about 10% for the year. And home improvement retailers Home Depot (HD 5.02%) and Lowe's (LOW 3.65%) have both had tremendous years, up 25% and 36%, respectively.

HD Chart

So let's take a look at why these four companies performed so well this year.

In the case of D.R. Horton, one look at the company's latest earnings release tells you all you need to know. The company's net sales orders increased by 18% year over year to 29,700 new homes, and the value of its orders increased 27% -- which means the homes sold were more expensive. Further, the company's backlog of business increased 21% year over year to almost 10,000 homes. This resulted in 13% higher earnings in 2014.

Lennar is in a similar situation, with new orders up by 23% and its backlog expanding 22%. The company is also branching out to new areas of the business, with the newly created Lennar Multifamily division completing the sale of its first two apartment properties this year.

As for Home Depot and Lowe's, a strong housing market and the improving U.S. economy have helped to boost sales significantly. Not only are people buying more new homes (29% more than five years ago), but they have more disposable income to make improvements and buy appliances and furnishings for their homes. In fact, over the past five years, per-capita disposable income has risen by nearly 15% in the U.S., with 3.5% growth in the past year alone.

The companies are also running more efficiently than they have in the past. Both companies are seeing strong same-store sales growth, and are growing some new and exciting areas of the business. For example, Lowes' recently launched ProServices program, which is targeted at contractors and other business customers, has been one of the strongest growth drivers in the company over the past three years. And, Home Depot has said it is experiencing increased spending on remodeling and renovation projects.

Home Depot expects to report 2014 sales growth of 4.8%, but it also expects 21% year-over-year earnings growth, including all of the costs related to the infamous data breach.And, Lowe's is also expecting to report sales growth in the 4% to 5% range, along with higher operating margins. This should produce earnings growth of about 24%, according to the consensus of analysts covering the company.

Will the strong performance continue in 2015?
All four companies seem to be optimistic that they will continue to outperform. Lowe's CEO Robert Niblock recently said, "We are at a great point in our company's evolution." He emphasized that Lowe's is planning to explore some potential high-growth markets in the near future, such underserved urban locations like Manhattan, where Lowe's is planning to open two new stores in 2015.

The company also intends to increase the global penetration of its brand by furthering its expansion into Canada and Australia. Thanks to ventures like these, Niblock expects return on invested capital to reach 19% by 2017 -- a 500-basis-point increase.

Meanwhile, Home Depot has done a great job of integrating its online business with its physical stores, and it will continue to do so in 2015. In fact, about 40% of the company's online orders in 2014 have been picked up in-store. Home Depot is seeing so much success in this area that it's adding dedicated storage bays in 550 stores solely for this purpose, according to CEO Craig Menear.

Stuart Miller, Lennar's CEO, said the company's $5 billion pipeline of multifamily housing will be a big contributor to the company's bottom line during the next couple of years. And D.R. Horton said its enormous backlog of business is giving the company a great start to 2015. The continued U.S. housing recovery alone should produce solid growth in both of these companies, and new home construction is expected to be one of the largest growth areas of 2015. In fact, Freddie Mac economists are predicting that homebuilding will increase by 20% in 2015.

So long as the U.S. economy continues to grow and the housing market remains healthy, these four companies should have another excellent year in 2015. And that's exactly what many real estate experts are predicting.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$282.19 (5.02%) $13.50
Lennar Corporation Stock Quote
Lennar Corporation
LEN
$77.48 (5.46%) $4.01
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
LOW
$194.53 (3.65%) $6.86
D.R. Horton, Inc. Stock Quote
D.R. Horton, Inc.
DHI
$71.33 (5.64%) $3.81
Toll Brothers, Inc. Stock Quote
Toll Brothers, Inc.
TOL
$43.05 (5.44%) $2.22
Beazer Homes USA, Inc. Stock Quote
Beazer Homes USA, Inc.
BZH
$10.52 (4.99%) $0.50
iShares Trust - iShares U.S. Home Construction ETF Stock Quote
iShares Trust - iShares U.S. Home Construction ETF
ITB
$54.00 (5.04%) $2.59

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

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