Home prices in 20 U.S. metropolitan regions rose 2% in August, according to the latest Standard & Poor's/Case-Shiller Home Price Index, published in late October. New-home sales stepped up to their highest level in more than two years, as well, when the pace of homebuilding hit a four-year high in September. All of this is happening while mortgage rates are at near-record lows, giving a further boost to residential real estate.
Such data indicate that the housing market is bouncing back. I admit the recovery is still tentative, and could derail if the economy heads south. But, for now, the trends for the housing market are definitely pointing upward. This means that companies serving the housing market are potentially good investments at this time.
I have been looking into housing and housing-related stocks using my guru strategies, which are modeled after the strategies employed by renowned Wall Street investors. Few homebuilders, if any, merit approval under these strategies. But two companies are positioned to benefit from a sustained housing market revival do get high grades.
The first of these is Tempur-Pedic (TPX), maker of the well-known eponymous foam mattress. According to a strategy that I base on the writings of Joel Greenblatt, investors can sleep soundly while owning this stock. My strategy here incorporates two variables -- earnings yield and return on total capital -- and uses these variables to rank the thousands of stocks in our database. Then it comes up with a final ranking. Tempur-Pedic ranks No. 168 based on earnings yield, No. 88 based on return on total capital and, impressively, No. 28 overall. Note that Tempur-Pedic is also in the process of buying major mattress manufacturer, Sealy (ZZ).
Another company that's well positioned for the housing-market revival is Wells Fargo (WFC), the country's largest private mortgage lender. Wells gets the approval of my Peter Lynch-based strategy, which utilizes the P/E/G ratio, or price to earnings relative to growth, to indicate how much you are paying for growth. A P/E/G of up to 1.0 is acceptable and below 0.50 is impressive; Wells Fargo is in impressive territory, with a P/E/G of 0.47. In addition, the bank's equity-to-assets ratio of 11% is more than twice the 5% minimum that my strategy requires.
If you are willing to bank on a housing revival, consider both of these companies for your portfolio.