Daily Gains Letter

Two Small-Cap Plays for the Real Estate Rebound

By for Daily Gains Letter |

Two Stock Picks for a Strong Housing MarketFor those who believe the housing market is set for a downfall after running higher for five years, you may want to rethink that.

The reality is that the housing market is faring quite well right now, boosted by decent jobs growth—more than 200,000 monthly for the majority of 2014—and an unemployment rate at 5.8%.

The fact that the financing costs for the housing market remain historically low translates into what has developed into a healthy demand for new home builds and resale.

In the housing market, the news continues to be good. The key housing starts metric came in at an annualized 1.009 million in October. This was slightly below estimates, but nonetheless a good number. Encouraging was the building permits reading at an annualized 1.080 million units, representing the highest in more than six years. This is a good indication that the housing market is strong.

Other than the homebuilders, we are seeing excellent results and investment potential in the home and commercial building supplies companies.

The “Best of Breed” in this area, The Home Depot, Inc. (NYSE/HD) delivered good results, while rival Lowes Companies, Inc. (NYSE/LOW) beat by a penny and raised its FY15 earnings-per-share (EPS) and revenue guidance to above the consensus. The positive outlook gives investors confidence to expect growth in the housing market going forward, as long as interest rates don’t rise too quickly.

Now you can add companies like the Home Depot and Lowe’s to a longer-term buy-and-hold portfolio, but you may also want to consider taking some money and looking to play the small-cap end of the housing market.

Investment Opportunity in Small-Cap Building Supplies Stocks

There are two small-cap building supplies stocks I’d like to highlight that offer investors a good risk-to-reward investment opportunity.

Small-Cap Stock #1: Installed Building Products

Installed Building Products, Inc. (NYSE/IBP, $16.65) is the second-largest insulation installer for the residential new construction market in the U.S. with more than 100 locations. The company also deals with the commercial building and existing-home markets. Products include garage doors, rain gutters, shower doors, closet shelving, and mirrors.

The growth is good and well above the comparative growth rates seen with the larger companies. IBP is estimated to grow revenues by 19.2% to $514.79 million this year, followed by 19.1% to $613.11 million in 2015, according to Thomson Financial. These are healthy metrics. The stock has been rallying, so I would look to buy on weakness.

Installed Building Products Inc Chart

Chart courtesy of www.StockCharts.com

Small-Cap Stock #2: Builders FirstSource

A second small-cap that has above-average growth prospects is Builders FirstSource, Inc. (NASDAQ/BLDR, $5.85), which has a market cap of $581 million.

The company focuses on the residential new homes construction market. Builders FirstSource produces structural and related building products, such as roof and floor trusses, wall panels, stairs, aluminum and vinyl windows, custom millwork, and pre-hung doors. The network comprises 55 distribution centers and 52 manufacturing facilities situated primarily in the southern and eastern United States real estate markets.

Builders FirstSource Inc Chart

Chart courtesy of www.StockCharts.com

The growth metrics for Builders FirstSource are lower compared to IBP, but they are still very decent. Revenues are estimated to grow 8.8% to $1.62 billion, followed by an 11.8% jump to $1.81 billion in 2015, according to Thomson Financial. The stock has been under some pressure, so it could be a good investment opportunity at the current price.

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