Last year was the sweet spot for home-building stocks, when long-term interest rates began their decline. But now is a good time to consider investing in companies that make things that go inside the home rather than the home itself, such as furniture, carpets and textiles.
Sales of furniture and other home furnishings typically lag new-home purchases by up to 15 months. Although the group declined 24 percent last year, analyst Stephen East of A.G. Edwards believes the stocks can appreciate 20 percent to 35 percent in 2001.
Part of the reason for the current appeal of furniture stocks is that their prices were beaten down so far. But be selective now because earnings for these companies won't perk up before the second half of the year.
East recommends high-end furniture producers, such as Ethan Allen (ETH) and Furniture Brands (FBN), because consumers with more disposable income are less affected by rising energy costs and gas prices and are more likely to continue shopping.
Furniture Brands, which makes the upscale Thomasville, Broyhill and Lane furniture lines, also should benefit from a new licensing agreement with Home Depot, which will sell its higher-end cabinets under the Thomasville name.
Masco (MAS), which makes the cabinets for Furniture Brands, also will benefit from the Home Depot exposure. And lower interest rates, which spur homeowners to refinance their mortgages and undertake remodeling projects, should stimulate sales of Masco's Merillat cabinets and Delta faucets.
Carpet stocks' fortunes also should be in for a boost. Though the stock of Mohawk Industries (MHK), which has the second-largest market share in the industry, is up 60 percent from its 2000 low, it may still have upside potential. Mohawk is moving into the fast-growing flooring business.
Textile stocks drop before the overall economy weakens and rise before it strengthens. Analyst Kay Norwood of Wachovia Securities recommends Springs Industries (SMI), the maker of Springmaid and Wamsutta towels and sheets.
It has a solid balance sheet with no debt and a 4 percent dividend yield. Although the stock has increased 50 percent from its 52-week low, Norwood sees it hitting $40 over the next year.
Of the homebuilders, only the largest builders — such as Centex (CTX) and Lennar (LEN), both of which are geographically diverse, with healthy earnings and substantial backlogs — might qualify as timely picks, says Gregory Nejmeh of Deutsche Banc Alex Brown.