Daily Gains Letter

How to Profit from This Housing Market Oversight

By for Daily Gains Letter |

How to Profit from Improving Homebuilder SentimentThe housing market continues to show growth and offer a good buying opportunity. While the major upward push in the housing market may be behind us, I still see opportunities.

As long as interest rates and mortgage rates remain relatively low, you can expect the support for the housing market to hold for the next few years.

While housing starts and building permits numbers continue to be fairly strong, the National Association of Homebuilders (NAHB)/Wells Fargo Housing Market Index (HMI), which reflects the confidence of the homebuilders, increased to a healthy reading of 53 in July, up from 49 in June. A reading above 50 indicates positive sentiment in the housing market. It was the first move above 50 since January.

And the key components of the HMI point to optimism. The reading that reflects expectation for future sales jumped to 64. (Source: “NAHB, Builder Confidence Surpasses Key Benchmark in July,” National Association of Homebuilders web site, July 16, 2014.)

The HMI suggests the housing market will continue to show steady growth. As an investor, you may consider buying the homebuilder stocks or the suppliers of building materials to the industry.

A small-cap housing market play on the residential and commercial building markets that I like is Installed Building Products, Inc. (NYSE/IBP), which has a share price of $12.22, a post–initial public offering (IPO) range of $11.75–$15.47, and a market cap of $373 million. The company was recently listed in February at $12.30; so the stock has done little, which in my view, represents a buying opportunity for investors.

Installed Building Products Inc Chart

Chart courtesy of www.StockCharts.com

While the company is new on the capital markets scene, it has been around since 1977 and with more than 100 locations, it is currently the second-largest insulation installer for the residential new construction market in the country. Installed Building Products also supplies the commercial building and existing-home markets. The company also provides garage doors, rain gutters, shower doors, closet shelving, and mirrors.

At the current price, I like the prospects for price appreciation going forward, especially as the housing market continues to grow.

Revenue growth has been excellent. Installed Building Products expanded its revenues from $238.45 million in 2011 to $301.25 million in 2012 and $431.93 million in 2013. The growth is expected to continue at 21.2% to $523.41 million this year, followed by 22.5% to $641.28 million in 2015, according to Thomson Financial.

Installed Building Products is also now profitable after making money in 2013. Earnings are estimated to come in at $0.57 per diluted share this year, followed by $1.13 per diluted share in 2015.

In my assessment, the stock market is undervaluing the value and potential for Installed Building Products—and that is an oversight.

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