4 stocks that love stalled home sales

Home-improvement stocks already look strong, and continued weakness in home sales can only make them stronger.

By InvestorPlace Feb 29, 2012 11:59AM

Digital Vision/PhotolibraryBy Beth Gaston Moon

The current environment is bad news if you're trying to sell your home -- prices haven't been this low since the first season of "American Idol." (That's 2002 for you non-Ryan Seacrest fans.)


The Case-Shiller national home price index reported a 4% drop in Q4 2011, marking the biggest decline since 2008. Since the market peaked in Q2 2006, home prices have dropped 33.8%.


This disappointing trend comes despite pockets of recovery in other parts of the economic world. Industrial production has been gaining ground, for example, and consumer confidence is at an annual high. Even the unemployment rate is moving lower, finally, though perhaps not for long.


Every cloud has a silver lining, however, and most negative market trends have some beneficiaries. The group of companies that may be enjoying a little schadenfreude at the expense of homeowners are home-improvement retailers such as Home Depot (HD), Lowe's (LOW), Fastenal (FAST) and Sherwin-Williams (SHW). Respectively, this quartet of stocks has returned 38%, 35%, 63% and 38% over the past six months.


The rationale behind this relationship is twofold: First, consumers desperate to sell their homes may pour additional funds into improvements to make the property more attractive to buyers. Second, homeowners who realize they may not be able to sell might opt to spend on upgrades rather than shop around for a new place.


Technically speaking, HD is looking quite strong. The stock has rallied to a new 52-week high along support from its 10-day and 20-day moving averages. What's more, the shares recently overtook the $44-to-$45 region, which acted as price-level resistance throughout 2004-2006.


HD is now trading at levels not seen since -- what a coincidence -- 2002. Meanwhile, earnings have continued to grow at a 16% annual rate, and the stock's price-to-earnings ratio, at 19.1, is on par with HD's competitors.


Home Depot's top rival, Lowe's, is trying to overtake some technical resistance of its own. The stock has been muscling higher since last fall and is currently trying to break out above the $28 level. While this proved insurmountable for LOW in April 2010 and March 2011, the stock's current momentum may be enough to power it through this resistance.

Traders looking for a possible entry point should watch for a breakout above $30. Low's earnings growth is lower than HD's, at 8% year-over-year, but the stock's price-to-earnings ratio is lower as well, at 16.5.


FAST has been in a steady uptrend since late 2009, gaining roughly 150% since the beginning of 2010. Currently, the stock is exploring new all-time-high territory. Quarterly earnings have met or exceeded analysts' estimates in each of the past eight quarters, and year-over-year earnings have grown at a rate of over 20%. One caveat: FAST's price-to-earnings ratio stands at 42.6, well above the average in the industrials sector (19.0) or the S&P 500 (18.5).


Finally, the principal of paint -- SHW. Nothing spruces up a room more quickly and inexpensively than a new color, and SHW is happy to help. Year-over-year, earnings have grown by more than 18% and are predicted to keep edging higher in the next half-decade. Like FAST, SHW is currently trading near an all-time high and recently entered triple-digit territory.


Finally, if you like this overall theory, another name to consider that is adjacent to the home-improvement sector is Sears Holdings (SHLD), which has been rallying lately in the wake of some strategic changes. Valspar Corp. (VAL), another paint and coatings manufacturer, could also participate in any upside.


For those interested in Sears, I would suggest researching the pros and cons of owning its stock before making any final decisions.


As of this writing, Beth Gaston Moon does not own shares of any company mentioned here.


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