Three Stocks to Play the Housing Recovery – Without Owning a Homebuilder

Forecasts of an imminent housing turnaround have hedge fund managers hawking homebuilder stocks again, but the happy talk still makes a lot of investors nervous. Wasn’t that recovery supposed to happen last year? For the merely cautiously optimistic, it’s a good time to look at more subtle housing recovery plays: a.k.a. companies that would gain some from a turnaround but could live well without one. None of those are homebuilders.

For conservative investors, a wishy-washy approach to housing makes sense for a couple of reasons. First, even the buyers in the homebuilding sector are sounding a bit insecure about their bullish predictions. That’s not surprising considering statistics that seem to alternately support and contradict any rational theory on housing recovery every month. The report showing a 4.1% fall in December housing starts came out just after homebuilding stocks recorded some of their best rises in years.

US Housing Starts Chart by YCharts

Secondly, the buying frenzy has already begun, which probably makes homebuilder shares expensive. Since October, shares of homebuilder Pulte Group (PHM) have more than doubled; Lennar (LEN) and Ryland Group (RYL) were up about 40%. These rises were from terribly low bases – Pulte, which traded in the $30s back in the day, is still worth less than $8 a share – and don’t necessarily represent forthcoming successes. More likely, the wild price rises help illustrate the difficulties in valuing a bunch of companies that haven’t made money in years. YCharts Pro tags most of the companies below with Avoid ratings for weak fundamentals. (Ryland’s are rated average, warranting a Neutral rating.)

PulteGroup Stock Chart by YCharts

When homebuilding does fully revive, one would surely expect homebuilder share prices to rise. But to hedge against another 2011-like disappointment from that sector, here’s a look at a few of alternatives. YCharts Pro rates each of these companies as good or better on fundamentals and share price value.

LSB Industries (LXU)

LSB’s main business is selling parts, like heat pumps and air handlers, used in residential and commercial air conditioning systems. But almost half of its sales (more, last year) come from making chemicals for mining, construction and agriculture industries. It’s made a lot of money in both sides lately.

LSB Industries Net Income TTM Chart by YCharts

Particularly optimistic earnings reports from the company recently have sparked buying in the shares, but they still trade at a mere 11 times past earnings. The company has a market cap of about $788 million.

AO SMITH (AOS)

A.O. Smith is the world’s largest maker of residential and commercial water heaters and water purifiers. Despite a nearly 40% rise in its share price recently, the company still gets a swath of buy recommendations from stock analysts.

A. O. Smith Corporation Stock Chart by YCharts

Smith just sold off an electric motors division that helped dilute its housing exposure. But water heaters go out at rental homes and commercial buildings too, whether or not anyone is building houses.

General Electric (GE)

Massive General Electric has been a very popular stock for the past couple of months, moving GE’s market cap back above $200 billion, and not because it’s expected to put a lot of dishwashers in new homes next year. Its financial, aviation and energy infrastructure divisions are a lot more important to the bottom line, and they’re booming.

General Electric Company Stock Chart by YCharts

Besides, the company’s dividend yields 3.6% now. Dishwasher sales would be a bonus.

Dee Gill is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.