3 ways to play a housing rebound

A homebuilder, a construction products maker and an online real-estate service are poised for gains.

By TheStockAdvisors Sep 13, 2012 11:11AM

CorbisBy Mike Cintolo, Cabot Top Ten Trader

About the only thing to worry about in the housing sector is that it's quickly becoming a sector with little to actually worry about.

Whether it's home prices (up for the first time in years), homebuilders' confidence, housing starts, or results from individual companies, all the data suggest the housing market is continuing its steady rebound from the six-year bust. Here are three stocks poised to benefit.

Homebuilder Toll Brothers (TOL) saw its new orders and backlog rise 66% and 59%, respectively, a clear sign that the higher-end of the housing market -- where Toll specializes -- is coming back quickly.

Analysts see the bottom line growing north of $1 per share next year, but we think that could prove very conservative if business continues to accelerate as it has in recent quarters.

Most homebuilding stocks have been in a two-steps-forwards, one-step-back advance for months, but now they've tightened up and look ready for another leg up.

TOL looks a bit better than most in the group, and we think  the stock is buyable around here, in the $31.50 to $33 range, with a stop just below $30.

While homebuilders are the most obvious way to invest in the new housing upturn, Eagle Materials (EXP) is one of our favorite ancillary plays on the group.

The company makes its money by making and distributing cement, concrete, recycled paperboard and gypsum wallboard.

Eagle Materials is directly benefiting from higher demand in recent quarters. Earnings slipped for years, but importantly, remained solidly in the black.

Now, they are just beginning what looks to be an extremely powerful rebound. Sales growth is accelerating higher, while earnings are lifting off.

Buyers have stepped up their efforts, with the stock spiking higher last month on big volume. You could nibble here in the $41 to $43 range, with a stop near $38.

It's not a complicated story, but that's the point -- Eagle Materials is one of a handful of companies that survived the housing bust and it is now thriving as a durable leg up has gotten underway. We like it.

With consumers increasingly turning to the Internet, online housing specialist Zillow (Z) stands to benefit from a resurgence in the housing market.

Specifically, Zillow provides information about homes, real estate listings and mortgages through its website and mobile applications.

Zillow has attracted quite a bit of attention due to improving housing data -- according to the S&P Case-Shiller Home Price Index, home prices rose in all 20 tracked markets in June.

But the big news recently has been the approaching IPO of Zillow competitor Trulia, which has shed some light on Zillow's valuation. But Zillow easily stands on its own, snapping up revenue of $50.5 million and net income of $3 million for the first six months of 2012.

With Z trading back near $40 -- after testing long-term support at the $36 level -- now may be a perfect time to benefit from an extended rally. Buying a little here in the $40 to $41 area with a stop near $38 seems reasonable.

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