My Top Play for the Housing Recovery

At first glance, the latest round of economic reports doesn’t look promising for the housing recovery…

  • Yesterday, the Commerce Department reported that U.S. construction spending declined 1.1% to an annual rate of $971.4 billion. This surprised economists, who had expected construction spending to rise 0.2%.
  • Last week, the National Association of Realtors announced that sales of existing homes declined 4.9% to a 4.82 million annual pace in January. The bad news is that this was below economists’ estimates of a 4.95 million pace, and this was the slowest sales pace since May.
  • Meanwhile, in January, sales of new homes inched down 0.2% to a seasonally adjusted annual rate of 481,000. This surpassed economists’ expectations of a 450,000 annual rate. December new home sales were revised slightly from 481,000 to 482,000. At the current sales pace, there are enough homes on the market for 5.4 months.

However, for every storm cloud there’s a silver lining, as they say:

  • December construction spending was revised to reflect a 0.8% increase, double the 0.4% gain reported previously.
  • Existing home sales are still 3.2% higher than they were a year ago. And for the most part, the pullback in home sales was expected. January tends to be a volatile month for the housing market, and the recent bout of bad winter weather depressed sales in the Northeast.
  • New home sales are growing at a faster pace than existing home sales, having risen 5.3% over the past year. And December’s revised sales pace represents the highest level of growth since June 2008. The fact that new home sales kept going strong despite the unseasonably cold winter is a great sign.

Most importantly, spring is around the corner, and with it an expected rebound in housing activity. So in the spirit of the season, I’m recommending Lowe’s Companies Inc. (LOW). With over 167,000 employees across 1,830+ locations, Lowe’s Companies Inc. is the second-largest home improvement retailer in the world. Lowe’s is also the world’s second-largest hardware chain. From kitchen appliances to building materials to paint to electrical supplies, Lowe’s has it all. In addition its retail footprint, Lowe’s also offers installation and repair services through independent contractors and runs My Lowes, an online tool that manages and enhances homes.

And Lowe’s did not disappoint when it posted fourth-quarter sales and earnings last Wednesday. The home improvement retailer reported net earnings of $450 million, or $0.46 per share, a 47% increase over a year ago. The analyst community expected just $0.44 per share, so Lowe’s posted a 4.5% earnings surprise. Over the same period, sales climbed 7.6% to $12.54 billion, also topping the $12.31 billion consensus sales estimate.

Management also announced that last quarter it returned $1.225 billion to shareholders in the form of stock buybacks and dividends. Looking ahead to FY 2015, Lowe’s expects to bring in $3.29 EPS on total sales growth of 4.5% to 5.0%. This is above the Street view of $3.28 EPS and in line with analysts’ projections for 4.5% annual sales growth.

So as the winter blues give way to warmer spring temperatures, I recommend LOW as an A-rated Strong Buy.

Sincerely,

Louis Navellier

Louis Navellier

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