Renovations for your portfolio

3 home improvement companies to buy before housing takes off.

By Motley Fool Jan 31, 2013 11:07AM
Bathroom remodel Digital Vision PhotolibraryBy Nate Wooley

Earlier this week I took the stand over at The Motley Fool that housing is coming back. There's no doubt in my mind about that. The American economy is on its way back, as this Zacks story explains, and with it will come housing. After five-plus years of pain, homes are going to start selling.

But while it means new homes, it also means renovations. Not only will new homes be built, but existing ones are going to be fixed up and spruced up. With that in mind, there's a whole new area of investing to examine. An angle to the upcoming housing boom that I haven't yet poked around at for you people. I think it's about time I fixed that.

I'm writing, of course, about home improvement stores. Stores that those of us who ride a keyboard all day (admit it!) think about when we contemplate working with our hands instead of our thoughts. There's money to be made by investing in home improvement businesses ahead of the boom. Sure, homeowners shop there, but so do handymen, fixit guys, and construction firms. I know my handyman runs out there when he needs to get supplies. Why shouldn't you run there to make some money?

Home Depot (HD)
It's not hard to see why The Home Depot is a well thought of company. The retailer has been making itself increasingly visible over the last two years and has been carving out a niche for itself as the home improvement store where the pros go. Heck, my two girls have even gone there (they're 8 and 12) for lessons in handling tools.

As The Motley Fool explains, the company's profitability has been on the rise, gaining 11% from the end of 2011 to the end of 2012. This is a company that's in the right place to take advantage of the return of the housing sector. Home Depot's stock pays a solid 29 cent per share dividend, representing a 1.7% yield so that good, but not great.

On the other hand, the stock itself has been showing the faith the market has in the company. It went from a low of $44.39 to a recent 52-week high of $67.35. I don't know about you, but an annual return of 51.7% is something I'll take in my investments. I wouldn't count on it doing that again but I think it'll be a good one for a few more years, minimum.

Lowe's (LOW)
Lowe's isn't quite the slam dunk that Home Depot is, but I think it'll do well. It's certainly betting that it will, announcing recently that it plans to hire 45,000 seasonal workers, according to Staffing Industry, as the spring work season gets in gear. In addition, the company plans to add 9,000 part time staffers, too. Lowe's is committing to technology, too. It unveiled Iris, a system that allows homeowners to monitor their homes via wireless connectivity on their tablet or smartphone. Not only that but six months after the first one, Lowe's announced a new generation of the system at the recent Consumer Electronics Show.

Lowe's stock has had its rises and falls over the year, hitting $32 in early May before tumbling to $25.60 by the end of the month. However, it's been building value since that time and is now at $38.41, a 52-week high. Like Home Depot, Lowe's pays a dividend. Again, it's not great, but it's good. The 16 cent dividend makes the yield 1.67%.

Lumber Liquidators (LL)
Having just put in new flooring through my South Carolina home, I know all about Lumber Liquidators. At least I know how to write them checks, anyway. Unlike the others on this list, Lumber Liquidators specializes in wood, mostly for flooring. This is a far smaller company than the other two I describe, but I think it's extremely well-positioned to take advantage of the coming housing boom. People simply like hardwood floors and Lumber Liquidators can supply it to homeowners and homebuilders at as fast a rate as they would like.

For your investments, I'd recommend LL more highly than the other two. The company has a lot of room for growth, both in sales and in new stores. While it doesn't pay a dividend, and I'm not happy about that, its stock has been on a rampage over the last year, as this Yahoo Exchange post explains. It's marched from $21.87 to $57.48. More than 100% growth in one year and the boom hasn't really kicked in yet. I think you should get some of this company and watch it grow.

Home building and renovation is really just starting to get rolling. We're in for some interesting times ahead and you should think hard about making these companies a part of your long-term portfolio. Think very hard about it because you might be seeing five years or so worth of really solid growth coming off five years of relatively hard times. I think the sector's a good play.
Tags: HDLLLOW
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