Ways to play a homebuilding rebound
Consider building long-term positions in these stocks and ETFs to play an improving housing market.
For the first time since the 2008 housing collapse we see signs of hope and an investment opportunity in the sector.
Consumer sentiment is improving. And affordability against median income is at one of its lowest points in history. All this has begun to move the markets. Here's a look at a variety of favorite stocks and ETFs to play this trend.
Some cautionary thoughts come to mind before I get to my recommendations. First, I believe the overall market is due for a fairly significant pullback. Second, the homebuilding stocks -- up about 85% since last October -- may pull back even more given the recent run they've had.
Once this happens, then I think you can begin to build positions. If you just can't wait or if I'm wrong you can take small positions now but no more than about 25% of your final target position. But over the longer term, 24 months or so, stocks in this area will continue to improve.
I am recommending SPDR Homebuilders ETF (XHB). This is an interesting basket of not only the major home builders like Lennar (LEN), D.R. Horton (DHI), and PulteGroup (PHM). It also holds a selection of related companies such as Home Depot (HD), Whirlpool Corp. (WHR), TempurPedic International (TPX), and Pier 1 Imports (PIR).
The units are up just over 14% over the past year compared to 5.5% for the S&P 500. Total holdings include 27 companies with roughly 30% of its assets in homebuilders and the rest in manufacturers and providers of home furnishings.
Another one that is worth a look is the iShares Dow Jones Home Construction ETF (ITB). Two-thirds of the total holdings of this fund are homebuilders.
Companies in the building materials segment occupy nearly 20% of the portfolio and home improvement related companies pick up another 9% of the total assets.
Names like Sherwin-Williams (SHW), Masco (MAS), and Ryland Group (RYL) are included in this basket. D.R. Horton (DHI) and NVR Inc. (NVR) are the two largest holdings.
This issue has not done as well as XHB, gaining 7.9% this past year compared to 5.5% for the S&P 500. Historically, the two issues trade similarly, but overall performance has been better with XHB.
Of course you can research individual stocks in these groups and look for higher beta (more risk, higher return potential) than you will get from the ETFs.
Toll Brothers (TOL) is one of my favorites, but as usual, you will trade some peace of mind for the possibility of improved performance.
For a lower-risk play, PulteGroup (PHM) is another favorite. This is an unusual stock in that it is based on a 40-year debt instrument. As such, there is very little upside price potential here. However, it pays a hefty dividend, unlike many other companies that had their dividends suspended after the housing market collapsed. The current payment is $1.84 per share annually for an attractive yield of 7.4%.
MORE ON MSN MONEY
Copyright © 2013 Microsoft. All rights reserved.
Quotes are real-time for NASDAQ, NYSE and AMEX. See delay times for other exchanges.
Fundamental company data and historical chart data provided by Thomson Reuters (click for restrictions). Real-time quotes provided by BATS Exchange. Real-time index quotes and delayed quotes supplied by Interactive Data Real-Time Services. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by SIX Financial Information.
All hail the bull market, which ended the week with a big rally. But it also is starting to look a little like 1987, which suffered an epic blow-out.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.