Though still below the historical average, residential land sales in Sydney made an impressive gain of 33% in 12 months up to June 2013. RP Data and the Housing Industry Association released their June quarter residential land report, showing that land sales nationally increased by 18% in the June quarter. This is further evidence of a recovering housing market, so how do you as an investor take advantage of it?
These 4 land, materials and contruction stocks will all benefit from a housing boom.
Stockland (ASX: SGP) is a land developer so they will be in the first line to see revenue and earnings increases. Recent trends are for smaller lots between 320-450sqm, so it has more product to sell in the same land area. It has had some larger than average write-downs in the past two years which have pulled down earnings per share (EPS), but housing growth can turn those negatives into positives with higher sales volumes.
Building materials producer Brickworks (ASX:BKW) is in the second line of benefiting as they fill the orders from construction companies gearing up to build houses on newly sold land. With building approvals times, the land sales happening now will become new construction later in 2014, so investors have an opportunity to start a position before the earnings possibly go too far up.
CSR (ASX: CSR), well known for its drywall products, will also be selling more materials into this upturn. Last year's earnings after tax took a similar hit from asset write-downs, but the share price has recovered from $1.18 in July 2012 to its current $2.38, so already the price is reflecting the improving market sentiment.
Lastly, the builders complete those houses and sell them off. Companies like AV Jennings (ASX: AVJ) and Devine (ASX: DVN) have rallied in share price as well recently, but they still are coming up from very low bottoms that reflected the depression they were in during the GFC. AV Jennings is about $0.60 a share and a PE of 17, and Devine is at $1.35 and a PE of 22.
The Foolish Takeaway
The ideal time to buy into a company or industry is when it's depressed and you can pick up the good ones at discounts to help your portfolio return when they return to fair value. In this case, the move has already started up, but it could be a number of years before the housing industry hits another peak in this cyclical business.
Look for durable competitive advantage in brand name, product reliability and reputation, as well as examine a company's historical earnings and growth, and pick the most stable and strong of the group.
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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.