To capitalize on the U.S. housing recovery—which has accelerated since 2011—people should focus on more than traditional real estate investment.
They should also consider companies that are tied to home repairs and remodelling, says David Hollond, CIO of U.S. growth equity, mid- and small-cap, at American Century Investments. He manages the Renaissance U.S. Equity Growth Fund.
Read: New home sales jump
When home prices were falling or stable, he adds, many people put off home repairs since they didn’t want to “put money into an asset that was losing value.”
“With home prices rising steadily, [however], people are spending money on their houses,” finds Hollond. Renovation activity is also being driven by increased turnover in housing stock; as the economy improves, people are being offered better jobs that require they move, or they’re choosing to find bigger homes as their confidence rises.
“The key to turnover,” Hollond continues, “is when [someone] sells a house, [they] fix it up and spend money on remodelling. Then the new owners buy [that house] and fix it up” again so it fits their preferences. As such, higher home turnover rates provide a double benefit to home improvement companies.
Hollond invests in well-run companies that are positioned to take advantage of these housing trends. One of these companies is Fortune Brands, which sells kitchen cabinets. It’s a good investment, he adds, since kitchen renovations are one of the most popular home fixes.
Hollond has also invested in Lumber Liquidators since “there seems to be a resurgence in hardwood flooring…We’ve seen [that company’s] same-store sales accelerate.” In the most recent quarter, those sales grew 17%, compared to only 11% or 12% in late 2012.
The company is also benefitting from catering to the home renovation crowd. Hollond says Lumber Liquidators has been moving its stores from industrial, or tier 3, locations (where rent is lower) to suburban, or tier 2, locations. That’s helping boost the company’s appeal and access to wealthier clients. Further, Lumber Liquidators is changing the layout of its stores so they include more showroom space.
It’s important to understand what’s driving business growth both on a company and sector level before choosing an investment, Hollond adds.