A Good Record
According to Reuters: “Over the last two decades, Harvard’s $31 billion endowment, the nation’s largest, has delivered annualized returns of 12.5%…” That’s pretty impressive. So it makes sense to listen when the head of the endowment, Jane Mendillo, talks up a sector. Housing, then, deserves a look.
Another Take
Interestingly, John Hussman, who is negative on the market overall, recently gave investors a good reason to believe that the housing market has some legs to it. He notes that there are still millions of homes worth less than the mortgages owed on them. Since these can’t be sold, “…the demand for homes resulting from household formation is satisfied from limited inventory plus new home building.”
While the long-term picture he paints isn’t positive, the housing analysis suggests that new homes sales may have more room to move. This is particularly true if companies like Blackstone continue to buy up distressed properties to turn into rentals. Here are some ways you can get in:
DR Horton
D.R. Horton, Inc. (NYSE:DHI) focuses on the new home market. If Hussman’s analysis is on the mark about new household formation, Horton builds the types of homes that should be in high demand.
The housing led 2007 to 2009 recession was nothing short of devastating for the home builder. In fact, in fiscal 2008, it lost over $8 a share. That’s a lot of red ink! However, it didn’t sit idle. Management worked to reduce debt and cut expenses. That’s set the company up to prosper as the housing market recovers.
The company’s performance took a notable turn upward between fiscal 2011 and 2012, when earnings went from around a quarter a share to well over $2. It probably isn’t reasonable to expect that kind of a gain in the near future, but continued solid performance wouldn’t be unreasonable. The shares had a decent run last year, but momentum investors who think the housing market recovery is going to continue should be interested.
Lennar
Lennar Corporation (NYSE:LEN) also sells homes to first-time home buyers. So it, too, should prosper under Hussman’s scenario. Like Pulte, the company used the housing downturn to streamline operations and reduce liabilities. However, a notable aspect of its efforts was the reduction in the number of off-balance sheet deals it had.
While the idea of keeping certain things off of a company’s balance sheet was considered good business at one point, the recession quickly changed that view. Indeed, many of the banks that used such techniques wound up taking government handouts. This has been an important step for Lennar Corporation (NYSE:LEN) in rebuilding trust with investors.
While Lennar Corporation (NYSE:LEN)’s earnings bounce between 2011 and 2012 wasn’t as pronounced as Pulte’s, it was still nothing short of impressive. Continued solid gains are likely if the housing market continues to improve.
Weyerhaeuser Company (NYSE:WY) and Plum Creek Timber Co. Inc. (NYSE:PCL)
Weyerhaeuser Company (NYSE:WY) owns 6 million acres of timberland in the United States, mostly in the western and southern domestic regions. These are more productive growing regions. Moreover, being in the west sets the company up to export products to Asia (about 30% of the top line is derived from foreign sales).
About three quarters of Weyerhaeuser Company (NYSE:WY)’s business is pretty directly tied to the housing market. The remainder is connected to the cellulose sector (the fibers used in such things as diapers). The cellulose business held up well through the housing market slump. Of course, the housing-related portion of the business didn’t.
With the new home market seeing signs of improvement, Weyerhaeuser Company (NYSE:WY) is poised to play a big role in a resurgent home building sector. Add in the ability to tap foreign markets, like Asia, and a good chunk of business outside of housing, and the company looks like a reasonably diversified play on a housing recovery.
Plum Creek Timber Co. Inc. (NYSE:PCL) owns 6.4 million acres of timberland. About half is located in less productive areas of the country. However, land sales have been a big factor in recent years. The land sold is often used for new home development. That makes it hard to value Plum Creek Timber Co. Inc. (NYSE:PCL) as a timber company, but gives it some interesting potential if the housing market continues to improve. This one is a much riskier play.
Both timber companies are REITs, but their yields are relatively low after notable price advances. Momentum investors might consider the stocks.
New Homes
While it’s too soon to say that the housing market is recovered, there are definite signs of recovery. Investors can tag along in this Harvard “bright spot” with the above investment options.
The article Harvard Likes the Housing Market originally appeared on Fool.com and is written by Reuben Brewer.
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