The hidden success story in housing

Homebuilder shares are slumping this year, but the companies that make the goods for new homes are soaring.

By Jim Cramer Nov 4, 2013 10:53AM

Image: Home kitchen (© Tim Pannell/Corbis/Corbis)The dichotomy between the housing stocks and the stocks of companies that make goodsTheStreet.com logo that go into new homes is about as stark as I can remember. And the disparity is growing.


You take high-quality home-related stocks like Masco (MAS), up 25%, Home Depot (HD), up 24%, and Lowe's (LOW), up 38% for the year and you compare them with homebuilders like Pulte (PHM), down 3%, Toll Brothers (TOL), flat, Lennar (LEN), down 9%, and DR Horton (DHI), off 6%, and you might as well be talking about two totally unrelated industries.    


That's because they are two different industries. One's related to confidence, credit, cost of building homes and interest rates and the other is just about pent-up demand to spend on a house you already own, knowing that your house is done going down in value.


I think that the confusion over these two parts of the housing story is what has kept a lot of people out of Whirlpool (WHR), up 44%, or Masco or Fortune Brands (FBHS), up 45%. Investors just don't believe that they aren't a tandem, that they aren't handcuffed.

 

It's still one more example of a changed market that people don't understand has occurred. The housing stocks haven't done much at all year. They didn't do much ahead of the interest-rate spike and they have done much since. I think that's because they are still expensive relative to earnings. They ran up so much going into the year that they will have to stay put and the fall will have to be a good selling season if they are even going to maintain their current price levels. I don't think it will turn out to be so because of the sequester, debt ceiling and budget shutdown debacles.


But the housing-related stocks were standouts coming in to the year and then got hammered only with the sudden rate increase. Ever since, then they have slowly but surely come back as the 10-year drifted below the 2.5% level. I think these stocks are now, to a degree, vulnerable again if rates tick up to 2.75% -- as they appeared to be during the end of last week's session -- but that they are benefiting from a consumer that has a predilection for hard goods over soft goods. I don't see that changing anytime soon. 


I expect the housing stocks to continue to perform poorly for the rest of the year, given the damaged psyche of the consumer thanks to Washingtonian bungling.


But I think consumer spending on his or her home is not going to let up, even as the stocks will go down based on a rate rise if it continues. I think the opportunity in the sector comes if rates back up to 2.80% and the housing-related stocks get hit again. Then you have to pounce because the earnings will be unimpeded, even as the stocks say they should be.


They won't be and that's why they are buys.


My favorite? It's Lowe's because the chain has gotten it together and closed the gap with Home Depot for the first time in decades. But Home Depot will be no slouch either and I expect it to pause and go higher still.


But the homebuilders? I still see no reason to own them. Their multiples aren't so low, their sales prospects aren't so high that they can be considered either value or growth stocks. Only time or price can solve those and that's something nobody wants to wait around for anymore, especially if there's no dividend protection or, for that matter, protection from Washington if you own these underperforming stocks going into 2014.


Jim Cramer's headshot


Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long LOW.





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140Comments
Nov 4, 2013 12:48PM
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Once again Fatty is making his daily rounds passing and pi$$ing negative judgements on everyone who posts.  If Fatty was the only poster here would he then be happy?  No and Hell no as he would continue searching for us as we are his only family and connection with reality. So lonely, so  sad, so pathetic.
Nov 4, 2013 11:18AM
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Once investors both foreign and domestic have bought up the properties of worth what will housing sales look like?  
Nov 4, 2013 11:45AM
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The subtitle of this article is stupid.  You say that companies that make goods for new homes are soaring, and then cite Lowe's and Home Depot as your example of that?

Last time I checked, Lowe's and HD didn't make anything, they just sell stuff.  And they sell more stuff that goes into existing homes than goes into new homes.  So to suggest there's some kind of disconnect between homebuilder stocks doing poorly and home improvement retailers doing well is just stupid.

Don't think I'd want to own any homebuilder stocks right now.  The price of building materials is really going up fast, and interest rates are headed north, too.   And there's still plenty of existing homes on the market.  There's better plays out there, like the retailers, lumber companies, tool companies, DuPont, etc...  Why be exposed to just a homebuilder when you can own companies that profit from both new and renovation construction?
Nov 4, 2013 2:07PM
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Okay after reading my earlier post over I don't think I stated the obvious.  Lowes sells products that are manufactured by workers overseas making about $3 per hour on average.  These products are being purchased mostly by consumers making $25 dollars per hour average and contractors who sell them as a finished product who make perhaps $50 per hour.  Now when the American purchasing these products is making maybe $4 per hour equivalent how much profit will Lowes then make?  This is called an arbitrage where free trade sinks the heavier waged ships and raises the lighter wage ships.  But in that there are perhaps 50 times more workers in the developing countries the lift up will be much much less than the push down.  This will sink the American Standard of living accordingly. This is the essence of Globalization.  This process will in time lower the fees Doctors, Lawyers, and Dentists can charge and is the inclussion in the long term ACA plan.  Do you folks not realize by voting for this present corrupt political institution that you are in reality cutting off your own best friends?
Nov 4, 2013 1:58PM
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Four post in a row......... Did you forget to take your Ritalin Beav ?

Nov 4, 2013 1:00PM
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I got a little chuckle on Friday when the media asked Obama about the L.A. ex shooting.  His comment was "we at the White House are all over it"  yet when asked about our Embassy being under Attack he seemingly found it so unimportant as to just retire for the evening or do something else more productive like getting ready for a campaign trip to Vegas.  I watched several interviews over the weekend where some very noteworthy Liberals are beginning to push back on this nonsense so perhaps just perhaps there is hope.  But then Romney opened his mouth and well you know the hate thing takes over and the rest..  Now is a good time for anybody but the Liberal Media to be quiet.
Nov 4, 2013 1:22PM
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I guess when you get right down to it all welfare is corporate welfare. Direct money or indirect money. Fund them or fund the spenders that become their customers.
Nov 4, 2013 12:56PM
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There is not enough spenders in the USA without the Government funding spenders. Too much of everything without productive people to buy it. If that slows down inflation will go up because the corporations will attempt to hold their profit line.
Nov 4, 2013 6:09PM
Nov 4, 2013 2:13PM
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With the current new emphasis on rentals for both homes and apartments, where home ownership has taken a back seat, I'm not sure Cramer's analysis is correct.  Renters do not buy home improvement items.  They might buy some furniture, odd and ends, perhaps some decorating materials.  That's about it.   
Nov 4, 2013 12:31PM
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Be afraid of Rental Back Securities.  Be VERY Afraid.  When you hear that they are "risk free" just think about what that means.  It means delinquent payers will have a harder time staying in the home, fine dandy and all if you can't afford it don't rent it gotcha.  But there is another risk that credit risk and that is prepay risk.

 If a Rental Backed Securtiy is rent-to-own it doesn't sound much different than a mortgage. Except if you take away the prepay risk and just pay flat rent without ever prepaying your mortgage, well equity quickly disappears from the borrower and magically re-appears in the pockets of the investor.  Granted nobody should prepay a mortgage if they snagged one under 4% but still!  Traditionally you use your house as collateral for other loans, you gotta build up equity to do so!
This of course is another scheming way to shift wealth from middle class who hasn't recovered yet to the investing class who caused the great recession.
Nov 4, 2013 2:14PM
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Ok...... I will post something about the story. The only housing success story right now is someone buying a home in a nice area with good neighbors that is close to work and planning on living there for 10 or so years......... You know buy a home not an investment. At the end of 10 years if no one like Little Beav or V V has moved in beside you....... Wow, you did good.
Nov 4, 2013 3:25PM
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DLH:Sorry to burst your bubble but by the end of the month this website trouble will be over

and millions who couldn`t get insurance the last few years wll be signed up.Enjoy this time and

next month youcan dream up another scandal.Just keep the hopes for a market crash.The blondes

on Fox will say"Market crash?You mean the super markets were bombed?"

Nov 4, 2013 3:54PM
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Like I said last week ----rustyPud and dhl and all the other baggers are prematurely ejaculating (they are used to it) ---- all over the "website" issues .... as Brent says in 6 months all the early issues will be done with and fox and limpdick will have to go back to trying to blame President Obama for little big horn or the attack on pearl harbor  !!!

Off out to enjoy the "hospitality" of Cardiff ....If I survive heading to the Emerald Isle tomorrow !! 

:)
Nov 4, 2013 11:53AM
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Oh to be a child again. We had a wonderful little fairy tale we called Humpty Dumpty.  As I have aged this wonderful little story has as well. We now have our daily recital of a similar fairy tale we shall call Jim's story of  Hopey Changey.  Same kind of story just now there will be no happy ending.
Nov 4, 2013 4:31PM
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Twitter (TWTR)....Can kiss my fat white azz....
Nov 4, 2013 2:57PM
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LOVE 

SHOTGUN ??     BIDEN WOULD APPROVE !
Nov 5, 2013 11:46AM
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Traders  got together and decided this morning to take the markets down .. no matter if Services  showed expansion ... t was a Bear trap ... thee manipulators seem to succeed in playing honest investors for suckers.
Nov 5, 2013 9:44AM
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wow   still   waiting  for   an   explanation   that  actually  holds   water   as  to  how  "the  shutdown"   cost  sooooo  much  money...  lots   of   hot   air   and  innuendo   but  nothing   that  actually  makes   sense.
Nov 4, 2013 11:21AM
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There's another housing bubble building in California - this time, investor groups are the main culprits.

Now investors own more so they can charge more rent (rents are going up).
Where will the little people live Jim? when little people can't afford homes and the rent is too damn high.

I'm telling you - people have had enough, and I won't be surprised when the revolution happens.

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