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Two Favorites for the Housing Rebound
02/25/2014 7:00 am EST
Each month, Ian Wyatt highlights his favorite current stocks in the model portfolio of 100k Portfolio; in his latest review, he looks at two plays on housing.
The housing recovery is picking up steam. And homebuilders like Toll Brothers (TOL) stand to benefit most. Its profits are expected to surge 66% this year, while revenues are projected to grow by 48%.
It's a reflection, not only of the housing rebound, but Toll Brothers' specific niche within the housing sector. The company is a leading builder of so-called "McMansions," with an average sale price of $706,000.
They cater to the affluent few, many of whom have returned to their free-spending, pre-recession ways. As the US economy recovers, the super-rich are spending more and more—and a good chunk of that money is going to real estate.
Toll Brothers has already been a nice winner for us, since we added shares to the portfolio nearly two years ago. The stock has risen 46% during that time.
Despite its recent ascent, TOL still only trades at roughly 16 times next year's earnings. With profits expected to more than double between now and the end of 2015, that valuation is still a bargain. Even after some nice gains the last two years, Toll Brothers has plenty of upside left.
United Rentals (URI) is another way to buy the housing recovery...or, should I say, "rent" the recovery? The firm is the leading construction-equipment rental company in North America.
It rents heavy equipment—bulldozers, cranes, excavators—to construction companies at a cheaper price than what it costs to buy the equipment. And, with operations in 49 of the 50 US states and all ten Canadian provinces, United Rentals is the dominant player in the construction-rental space.
And that space is growing rapidly. When the construction-rental business was founded 20 years ago, only 5% of US construction companies rented equipment. Today, rental penetration in the US is up to 50%. And the industry is still growing.
That business will continue to grow, as new homes and offices are being built, and as the cost of buying construction equipment rises. No company will benefit from that growth more than United Rentals.
In fact, it's already benefitting. URI shares have returned 31% since we added the stock to the portfolio four months ago. Despite that rapid increase, shares still trade at just ten times forward earnings. Like Toll Brothers, United Rentals is a cheap way to play the housing rebound.
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