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2 Housing Picks for All Ages

06/25/2013 9:45 am EST


Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Mark Skousen of Forecasts & Strategies sets his sights on these companies that offer housing for very different demographics.

Here is a big way to profit from Obamacare. It is no secret that the American population, as it is in Europe and Japan, is aging. The Baby Boomers are retiring, and it won't be long before they will face health challenges.

One way to profit is to invest in a new growth market: Nursing homes!

Omega Healthcare Investors (OHI) is a Maryland-based owner of more than 400 nursing and assisted living facilities in 35 states. It's a real estate investment trust (REIT), and there's plenty of room for further acquisitions of health-related properties. It offers a healthy balance sheet and bottom line.

Revenues rose 20% in the past year to $367 million, and earnings advanced 46% to $133 million. With 36% profit margins, OHI's return on equity (ROE) is more than 13.5%.

Omega has had a rising dividend policy for the past ten years. Today, Omega pays out a 46 cent dividend per share (6.5% annualized yield), the highest of its peers.

Despite a rising stock price, Omega sells for 13 times estimated earnings in 2013 and has been beating estimates. Let's add Omega to our portfolio.

Meanwhile, traditional housing stocks are still on fire. Sales of new homes in April were up 29% from last year, hitting a better-than-expected seasonally-adjusted rate of 454,000. The data builds on recent evidence that the US housing market is finally getting back to full health.

Pent-up demand is one factor behind the improving sales of new homes. "Household formation actually ramped up for the last year or two after some pretty substantial declines," Pulte Group CFO Bob O'Shaughnessy said.

I am recommending D.R. Horton (DHI), the country's largest residential homebuilder. The company reported earnings in April, but since then other major housing companies have announced blockbuster earnings, boosting the whole sector.

Rival Pulte Group (PHM) reported strong first-quarter results with double-digit percentage increases in home sales, improved sales prices, gross margin expansion, and solid overhead leverage. Toll Brothers (TOL) announced a 33% increase in home sales and a 38% increase in revenues year to year.

Texas-based builder D.R. Horton will report earnings again in July. It builds single-family homes, duplexes, townhomes, and condominiums in 26 states. It also originates and sells mortgages, as well as title insurance policies and other closing services.

In the most recent quarter, earnings soared 173% on a 49% increase in sales ($5.1 billion). Profit margins are 21% and management is earning a healthy 33% return on equity. Yet the stock is still cheap, selling for only nine times earnings. It has plenty of room to increase its dividend dramatically.

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