We all know Home Depot (HD) and Lowe's (LOW) are doing fabulously. It's a given. We know which aisles are selling out and which categories are literally blowing the doors off.
But what we haven't been able to figure out is how to profit from these robust sales beyond these two companies. We haven't been able to do so, because we have been so worried about the darned Fed, so scared of our shadows, that we have allowed stocks to creep up that now seem certain to bust out despite the Fed and despite what some would regard as tepid demand for new homes.
Now, some of the difficulties of the read-through from these two home improvement giants come from the far-flung nature of the companies that sell into the companies themselves. If you had to ask me what the strongest categories were for both of these two institutions, I would come back and say appliances. But, look out, trying to make money in that category is almost impossible. Whirlpool (WHR), you would think, is so obvious that it's painful.
However, if you ask the Whirlpool shareholders, they would say that the only thing that's been obvious about owning this stock is the pain it has caused. That's because Whirlpool remains a huge presence in Brazil and other than Venezuela, Brazil is the worst civilized, Western nation on Earth to do business in right now. The country has done incalculable damage to every company it touches.
You could be in Electrolux (ELUXY), which is trying to buy Dividend Stock Advisor holding General Electric's (GE) appliance division, but then you would be butting heads with the Justice Department, to which I say, no thank you.
So what's second best? I would say anything that involves remodel and reconstruction, and that's where you have to go if you want to play the derivative investments from Lowe's and Home Depot.
Now, you will blanche when I tell you the four names that I think are worth investing in, because with one exception they are so high that you will say you have missed the move, especially in light of the Fed's rate lift-off.
I am urging you, however, to rethink that harsh judgment. You need to do so because the four that are most investible -- Stanley Black & Decker (SWK), Fortune Brands Home & Security (FBHS), Masco (MAS), and the rarely thought-of Masonite (DOOR) -- are surfing a high single digit-low double digit wave of growth that is actually accelerating as we head into 2016. And, given what Carol Tome, the excellent CFO from Home Depot, had to say about the longer-term trends -- household formation and the need to reinvest in neglected housing stock -- I can't say you are too late to this party.
Notice, I didn't say early. That's not possible. These stocks have had big moves, but not so big that you can't buy them. In fact, only Masco, up 34%, is truly in world beater status. Masonite, plus 2%, (the aptly-tickered DOOR id you are looking), Stanley, plus 11% and Fortune Brands, positive for 19%, simply don't capture the gains that these companies are having.
Together, these four have only 36% market cap, which, I would argue, is way too small for the organic growth these companies are experiencing.
Now, with the exception of Masco, which is the purest play -- hence its outsized performance based on superior kitchen and bath products -- each has flaws that have held it back. Stanley Works has a ton of international business and can't be viewed as a pure tools play, even as that's probably the second-hottest aisle in these stores. It has a huge forex problem that has obscured much of the good. So does Masonite, which is EBITDA-positive but few seem even willing to attempt to understand the company, and those that do think it is wildly expensive on earnings. I disagree, but it does sell at 66x actual earnings, so the 42% EBITDA growth seems to have been discounted. And I can't say Fortune Brands is cheap, either, at 26x earnings.
Nevertheless, I think that judging by the trends that Home Depot's Tome highlights, trends that are far more secular than cyclical, all four are buys. That's right; I would buy any of these. Here's how I would do it. We are still stuck in the wake of HD and LOW's reports. A week from now, when we are fretting about the upcoming employment number and we have forgotten about the great quarters of Home Depot and Lowe's, these stocks will have slipped back. That's when you have to pounce, because their scarcity value trumps their stretched earnings multiples, and that means you've got a wind at your back that's not going away any time soon.