Housing Boom Leaves Some Stocks in the Dust

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A sign overlooks the Toll Brothers' Spring Valley Estates in Buckingham, Pennsylvania, February 4, 2008. Photographer: Mike Mergen/Bloomberg News.
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The housing boom continues, but don't make the mistake of assuming that every company related to the sector is a great investment. Some stocks may be rightfully soaring, but other logical winners aren't cashing in on the trend.

Toll Brothers (TOL) hit another 52-week high Wednesday after posting blowout quarterly results, but earnings reports out of the country's two leading home-improvement chains this week haven't been as inspiring.

Let's knock on some doors to spot the disparity.

As the Toll Tolls

The National Association of Realtors reported robust existing home sales Wednesday. The annual rate of existing home sales is closing in on 5 million properties, and that's the highest level since late 2009.

Naturally it's not just existing homes that are selling briskly. The demand for new construction is keeping residential developers busy, and investors saw that when Toll Brothers reported a 38 percent surge in revenue for its latest quarter.

The near future will be even rosier for the luxury homebuilder as new orders during the quarter clocked in at a seven-year high of 1,753 homes. That's a 36 percent increase during the past year, but higher selling prices are pushing the value of these new contracts up a whopping 57 percent.

It's not just Toll Brothers. Most of its peers have been posting similar blowout performances.

As My Orange Apron Gently Weeps

Snapping up new properties often calls for some domicile upgrades. The former owner's man cave may become a nursery. The cramped closet could use some organizers. That shag carpeting has got to go!

This would lead many to assume that Home Depot (HD) and Lowe's (LOW) are cleaning house -- literally and figuratively -- but that's certainly not the case.

Home Depot reported ho-hum results Tuesday. Revenue climbed 7 percent, but that was with the luxury of an extra week. Strip that away and sales would have clocked in only 4 percent higher than they did a year earlier.

Things get even worse for Lowe's, which, Wednesday, reported a 0.5 percent decline in revenue for its latest quarter.

The springtime cleaning that often boosts business at both hardware superstore chains failed to materialize in a manner reflecting the real estate boom.

Home on the Range

Just because Home Depot and Lowe's are struggling doesn't mean that home improvement is on the wane. Several weeks ago, wood-alternative decking leader Trex (TREX) and hardwood flooring retailer Lumber Liquidators (LL) posted strong quarterly results.

Trex and Lumber Liquidators saw their revenue climb 12 percent and 23 percent, respectively, and that makes sense.

Even if homeowners aren't calling out the moving trucks they are starting to spruce up their own digs. As real estate prices improve there are fewer homes with underwater mortgages, and that's the kind of breathing room that may inspire people to extend their outdoor living space with some Trex decking or to classy up their flooring with stylish hardwood.

It's not just the home improvement projects on the rise this week. Best Buy (BBY) and HHGregg (HGG) also reported quarterly results this week. Those reports weren't necessarily pretty. There's been a sharp drop in consumer electronics and televisions. However, both chains experienced big upticks in appliance sales.

That also makes sense. New homes require new appliances, and good luck standing in the way of someone that redoes a kitchen and wants new appliances that match then new design.

All of this does make the flattish sales at Home Depot and Lowe's a bit of a surprise. They sell appliances. They sell flooring. They sell decking and railing materials. But they just can't seem to get invited to the open-house party that nearly everybody else is throwing.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends HHGregg, Home Depot, Lowe's, Lumber Liquidators and Trex. The Motley Fool owns shares of Lumber Liquidators and Trex.

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    3 Comments

    Filter by:
    phild777

    Must be gold dust for HD. Up 30% ytd. They are throwing their own party. Time to cash in the chips on this one? Happy Memorial Day to all!

    May 22 2013 at 10:43 PM Report abuse rate up rate down Reply
    Frank and Barbar

    What Boom, when supply still out ways demand. The Housing market is improving, but this is not a Boom.

    May 22 2013 at 6:05 PM Report abuse +3 rate up rate down Reply
    legacykwst

    Home Depot and Lowe's both cater to homeowners.... not to investment buyers. Investment buyers, who are buying homes to renovate and flip, or rent, have cheaper sources for building materials, appliances, etc. Homeowners who might upgrade their own home in order to remain there or in order to sell when to non-investment buyers, have not yet begun to really spurge on renovations, because they are not sure that the market is going to continue to rise or because they simply do not have the cash or the financing to do so.

    May 22 2013 at 3:30 PM Report abuse -1 rate up rate down Reply
    1 reply to legacykwst's comment
    vlady1000

    What, cheaper than HD or LOWES? I own 11 rentals, buy 70% from Lowes, 10% from HD and 20% elsewhere. For our own house I may go to upgrade stores, not HD or Lowes

    May 22 2013 at 8:46 PM Report abuse rate up rate down Reply