After Wednesday's monster fiscal-cliff-deal rally, homebuilders and related industries confirmed their 2012 strength.
For much of 2012 I focused on smaller names that led the sub-sector in terms of price performance. I also screened for fundamentals because, over the longer term, that's what drives price appreciation. Mortgage-related companies such as Ellie Mae (ELLI) and Nationstar Mortgage (NSM) were big 2012 gainers until they began to falter in October. Small-cap Ellie Mae cleared a consolidation in Wednesday's rally, while mid-cap Nationstar still has work to do before regaining its October high of $37.20. Lumber Liquidators (LL) is another small-cap, housing-related name that notched big gains through October. This stock is also currently consolidating below its prior high.
Lately, however, I've turned my attention to larger-cap names that can be part of an equity overlay portfolio of individual stocks. The idea is to identify companies that can add alpha to a portfolio that consists mainly of exchange-traded funds.
Clearly, when looking at the housing names, that path leads directly to Lowe's (LOW) and Home Depot (HD). Of the two, Home Depot is the current leader when it comes to earnings performance, but that's not entirely a deciding factor. Technically, the two stocks are roughly on par, with both hovering below prior highs.
Analysts see Home Depot wrapping up 2012 and 2013 with double-digit earnings gains. Lowe's is expected to deliver earnings per share of $1.72 for the year, up 2% from the previous year, when it reports fiscal fourth-quarter results in February. Earnings are expected to grow 21% to $2.08 per share for next year -- better than the 14% growth expected in Home Depot.
Drilling down to return on equity, Home Depot is the leader. Its ROE of 24% far outshines Lowe's 13%. The two stocks are roughly comparable in terms of earnings and technical performance, but that's when it's important to dig deep into other factors that could influence your buying decision.
Makers of construction materials have also been gainers as the outlook for housing has improved. Wednesday, shares of Mexico-based cement and ready-mix concrete maker Cemex (CX) advanced 4.8% to $10.34. Though the stock has a market cap north of $11 billion, it's still fairly low-priced. It also fails to meet my fundamental criteria: Though it's been on a roll lately in terms of price growth, rallying along with the housing outlook, the company has been unprofitable since 2010. Analysts see 2012 and 2013 also winding up with losses.
I'm more enthusiastic about paint manufacturer Sherwin-Williams (SHW), another of 2012's housing-related winners that continues to consolidate in a potentially constructive fashion. Of course, it's wise to be cautious with a stock that has already sported a strong rally, as Sherwin-Williams has. The stock is perched beneath its Nov. 21 high of $159.80. Volume has been tepid as the price has declined, a good signal that professional investors were taking profits rather than bailing out. The company is expected to earn $6.52 per share in 2012, up 32% from 2011. This year, that number is expected to grow another 20%, to $7.81 per share.