The U.S. housing market now seems to be firmly on the road to recovery. The question is how to make some money from it. The home building stocks have all shot into nosebleed territory and most of them look overpriced. I wouldn't touch them unless there is a significant correction. But there are other possibilities.
Last September, I recommended two forest products companies as one way to participate in the housing recovery: Weyerhaeuser (NYSE: WY) and Plum Creek Timber (NYSE: PCL). Both have given us modest gains. Weyerhaeuser was trading at $26.53 at the time of my recommendation (all figures in U.S. dollars). It closed on Friday at $30.55 plus we have received $0.34 in dividends for a total return of 16.4% in six months. Plum Creek has moved from $44.76 to $49.77. Adding $0.84 worth of dividends, our total return is 13.1%. Both are still Buys.
This week, I have another suggestion for investing in the housing recovery.
The company is called Realogy Holdings Corp. and it trades on the New York Stock Exchange under the symbol RLGY.
Realogy is one of the largest, if not the largest, real estate franchisors in the world. Its brands include Century 21, Coldwell Banker, Sotheby's International Realty, and Better Homes & Gardens. It also owns title and relocation companies plus it has a significant joint venture mortgage business.
The company has over 13,000 offices with nearly 250,000 sales associates and operates in 102 countries around the world. It claims to have been involved in over 25% of all the domestic transactions in the U.S. this past year. Because of its multiple brands it is able to provide services to a broad spectrum of potential buyers and sellers. This allows it to take advantage of whatever segment of the market is moving and I can tell you that in the U.S. the market is really gaining momentum.
This was validated in Realogy's recent financial results where it reported not only increased volume but also an increase in prices with the average sales price increasing 8% in 2012 compared to 2011. The title and mortgage group experienced a 42% increase in refinances, which is another clear indicator that the housing market is on the mend.
Realogy Holdings went public last October coming out at $27 a share, near the top of the forecast price range. The IPO raised over $1 billion, which was largely used to pay down debt. This was a much-needed move; the company was overburdened with debt when it was taken private by hedge fund Apollo Management in 2006. Apollo still holds a significant position in Realogy.
The company has reduced debt by $3.1 billion from its IPO, placing it on a much firmer financial footing since interest charges will drop dramatically as a result. Realogy has also reduced operating expenses by more than $500 million per annum by shedding almost 5,000 employees and consolidating or closing over 350 of its brokerage offices over the last couple of years.
All this is paying off and when the company announced financial results for 2012 the numbers were very good. Revenue for the fourth quarter was $1.2 billion, which was a 30% increase compared to 2011. The company's adjusted EBITDA was $167 million, which was an increase of 61% year-over-year. These results came primarily from a 35% increase in sales volume, which tells you all you need to know about the improving health of the American housing market.
Yes, the stock is up about $20 since the IPO but I still think there is more profit potential here - maybe a lot more. There is no dividend so this is strictly a capital gains play.
Action now: Buy with a target of $57. The stock closed Friday at $47.70.