The best way to invest is to find great businesses, and hold shares over the long term. But sometimes the market creates opportunities for investors to make returns even juicier by selecting those businesses which are also favored by general market conditions. Construction on new U.S. houses rebounded 6.8% in May and with increased consumer confidence, everything points to a continued housing market recovery. At the same time, in the U.K. the chancellor’s ‘Help to Buy’ scheme should stimulate demand making the housing market a good play for investors on both sides of the Atlantic.
Restoration Hardware Holdings Inc (NYSE:RH) is one of the most innovative and fastest growing luxury brands in the home-furnishings marketplace. The company recently returned as a public company after a period of private ownership. This has allowed management to consolidate the experience of a number of years in the industry and prepare the company for a period of strong growth.
The strategy is to showcase the company’s prestigious products in spacious stores in prime locations. Experience shows that customers are more likely to visit and buy in an elegant, welcoming environment. Because the company can negotiate ‘anchor tenant’ deals in these locations, the company’s rent costs are lower than for an equivalent area in a secondary location.
In the first quarter, Restoration Hardware Holdings Inc (NYSE:RH)’s revenue showed an increase of 38% over the same period last year and comparable-store sales increased by 41%. On the basis of the company’s estimated EPS for the current year of $1.40, at the current share price of $74, we get a P/E of 53. While this is not cheap, if the company meets its strong growth targets, it could produce multi-bagger returns for investors over the next decade.
Tile Shop Hldgs, Inc. (NASDAQ:TTS) supplies a wide variety of tiles. Similarly to Restoration Hardware Holdings Inc (NYSE:RH), it believes that customers are more likely to buy if the company showcases its products in the best possible way, so its stores are laid out with complete examples of tiles installed in a variety of locations. Tile Shop Hldgs, Inc. (NASDAQ:TTS) also invests heavily in knowledgeable and helpful staff to give the customer a complete high-quality, retail experience. It is able to supply tiles at competitive prices owing to its extensive direct relationships with original manufacturers worldwide.
If we take Tile Shop Hldgs, Inc. (NASDAQ:TTS)’s EBITDA for the first quarter and extrapolate over 12 months we get a P/E of 19. For a company growing revenue at 24% per annum, that’s a very fair price. Like Restoration Hardware Holdings Inc (NYSE:RH), the company can grow considerably. The current store count of 71 stores can increase significantly over the next few years. The company plans to open 15 new stores in 2013.
Tile Shop Hldgs, Inc. (NASDAQ:TTS) could reap big rewards for investors if its expansion continues as planned.
Across the pond
The economy in the UK has been flat for the last few years, and doesn’t look likely to take off soon. But sometimes nice fish can be found swimming in the murkiest of pools. The chancellor, George Osborne, has instigated a housing ‘Help to Buy’ scheme. As a result, shares in home builders have risen substantially over the last year. The UK’s leading home builder, Persimmon, has seen shares rise by 120%. But if we look beyond the builders it’s still not too late for the savvy investor to capitalize.
Norcros plc (LON:NXR) manufactures shower fittings, bathroom accessories, floor tiles and glue. It has a P/E of 8 and a dividend yield of 3.5%. Earnings have grown steadily but not spectacularly over the last few years, but this has been at a time of torrid market conditions. If Osborne’s housing bubble doesn’t materialize, this is an investment that is still very fairly valued. But if house sales rise as predicted, this could prove a very rewarding investment.
Bottom line
Basing an investment strategy on the macro environment can often have unexpected results. Even the best commentators have been unable to predict dramatic changes to the economy in the past. But by combining the selection of good businesses with favorable market conditions, you can reduce the chances of things going awry. These three companies all have the potential to grow in any market, but if housing does take off as we expect, they may do very well indeed.
The article Take Advantage of the Housing Boom originally appeared on Fool.com and is written by Ian Richards.
Ian Richards owns shares in Restoration Hardware Holdings Inc (NYSE:RH), Tile Shop Hldgs, Inc. (NASDAQ:TTS) and Norcros plc (LON:NXR). The Motley Fool recommends Tile Shop Holdings. The Motley Fool owns shares of Tile Shop Holdings. Ian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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