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2 stocks that will benefit from growth in housing and construction

The Reserve Bank has been cutting interest rates of late, and it is hoped by many that the housing sector will pick up the slack as mining contributes less to the Australian economy. According to Reserve Bank Governor Glenn Stevens, the need for non-mining investment is one reason interest rates are on the way down.

Capital city home prices are once again on the rise, and governments have to date done little to address the increasing shortage of dwellings in capital cities. Homebuyer confidence is also on the rise. Investors may therefore wish to consider investments that are likely to benefit from growth in housing and construction.

One such company is Reece Australia (ASX: REH), which supplies bathroom and plumbing products in Australia and NZ. The company imports products (or buys them from local manufacturers), markets the products and sells them both to wholesale and retail clients.

Reece is tightly controlled by the founding Wilson family, who own well over 65% of the shares on issue. Indeed, four of the board members are Wilsons, the CEO is Peter Wilson and the Chairman is Alan Wilson. Despite having a significant interest as shareholders, both men have been paid millions for their services to the company over the years.

This is enough for me to avoid the company, but it does have merits as an investment. The company has not diluted shareholders in the last decade, has a strong balance sheet and pays a modest dividend of a bit over 2.5%, fully franked.

A far more attractive investment, in my opinion, is furniture retailer Nick Scali (ASX: NCK). The Nick Scali brand is very strong, partly because founder Nick Scali has a great reputation as an employer, philanthropist and soccer fanatic. This is a business that supports the community and this no doubt helps attract customers.

As with Reece, Nick Scali is dominated by the founding family. Managing Director Anthony Scali is the son of the 92-year-old founder, Nick. The Scalis sold many of their own shares in the IPO, but the founder is paid very modestly for his leadership role, and his descendants are on reasonable salaries

One concern is the recently announced resignation of the CFO and Company Secretary, Michael Potts (effective 20 September 2013). He only joined the company in February 2012.

Nick Scali is currently expanding. As well as increasing store numbers, the company has recently launched its new (lower cost) brand, Sofas2Go. Although the balance sheet is not particularly strong, the company should be able to fund its expansion plans comfortably as it can afford to take on some debt; as at the last report it had net cash of over $10 million. The trailing dividend yield is over 3.5%, fully franked.

Foolish takeaway

I wouldn’t buy either company at current prices, although I think Nick Scali shares need only to drop a little in price to be good value. I’m inclined to suggest that Nick Scali is the better option for those seeking exposure to housing and construction. The company boasts a strong return on invested capital, management integrity and reasonably growth potential. However, furniture stock is imported, so the lower Australian dollar is likely to disadvantage the enterprise.

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Motley Fool contributor Claude Walker does not own shares in any of the companies mentioned in this article. Find him on Twitter @claudedwalker.

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