2 ways to play the recovery
As the economy improves, these two companies are poised to reap the benefits -- one from the nuts-and-bolts side, the other from a financing angle.
By Mark Skousen, Forecasts & Strategies
Homebuilder stocks have made a significant turnaround in the past year, and that trend should continue.
New data show the U.S. housing market is recovering after years in the doldrums. Sales of single-family properties climbed 1.5% last month, and the March numbers contributed to the best quarter for new home sales since 2008. Housing starts rose to their highest level in five years, and while existing home sales fell last month, they're still ahead compared to a year ago. Inventories, too, have fallen to their lowest level in 20 years. Home prices are also coming back, thanks to the Federal Reserve's easy money policies.
Best way to play it? DR Horton (DHI), the country's largest residential homebuilder. The Texas-based builder has operations in 26 states. It builds single-family homes, duplexes, townhomes and condominiums. It also originates and sells mortgages, as well as title insurance policies and other closing services.
The company is on a tear. On April 25, in the most recent quarter, it beat analyst expectations. The homebuilder reported that earnings per share more than doubled to 32 cents, smashing analyst estimates of 19 cents. Revenue jumped 55.6% to $1.4 billion. Homes closed during the quarter rose 33% to 5,643, and new sales orders climbed 34% to 7,879 homes.
The company's profit margins are 21%, and it's earning a healthy 32% return on equity. Yet the stock is still cheap, selling for only nine times earnings. Let's add DR Horton to our ideal portfolio.
Meanwhile, in the past year, we have been big fans of private equity stocks and business development companies. These specialty finance companies are growing fast and increasing their dividends. They are taking full advantage of the Fed's easy money policies and the banking industry's reluctance to finance small businesses.
Kohlberg Kravis Roberts (KKR) has been the best performer by far. We're ahead 43% since January 1.
KKR is a New York-based global private equity investment firm specializing in acquisitions, leveraged buyouts, managed buyouts, special situations and growth equity, as well as mature and middle market investments.
It is the best of breed, beating out its competitors in practically every category: return on equity (20.3%), operating cash flow ($6.2 billion), and dividend yield (6% or higher). It's extremely rare to find an industrial leader that outperforms in every category and is still the cheapest in terms of price-to-earnings ratio (under 10).
Last month, the company beat profit estimates, and reported that assets under management rose to a record $78 billion. In addition, KKR announced that it would initiate paying a quarterly distribution totaling 40% of its balance sheet income.
Despite the run-up, KKR is still undervalued, based on its expected dividend yield (6% or better), its price-to-earnings ratio (7 to 8), and its PEG (price-to-earnings-to-growth) ratio (0.17). Anything less than one is considered an excellent PEG.
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