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Stocks that will benefit from the weakening housing market

The price drop in the housing market is accelerating and it threatens the share prices of a range of shares that are exposed to this industry.

This includes home builders like Mirvac Group (ASX: MGR) to property website operator REA Group Limited (ASX: REA). But there’s another group of stocks that may actually get a boost from the waning market.

These are stocks that are exposed to home renovations as this sector tends to get a boost when home prices drop (assuming the falls aren’t so significant that it brings down the economy). Your first instincts may direct you to Wesfarmers Ltd (ASX: WES) given its ownership of Bunnings, the largest DIY chain in Australia, but that isn’t necessarily the best way to gain some exposure to this thematic.

For one, Wesfarmers doesn’t give you as clean an exposure to the renovation market as it’s a conglomerate that has its hands in other sectors like retail and coal.

It’s also the same story for building supply companies like Boral Limited (ASX: BLD) and James Hardie Industries plc (ASX: JHX) given their significant exposure to the construction market and the US market.

A better alternative could be bathroom and kitchen furnishing supplier GWA Group Ltd (ASX: GWA). The stock has only just about kept pace with the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index with around an 8% gain over the past year.

Some investors may have been put off by management’s guidance for flat earnings before interest and tax (EBIT) in the second half of FY18 over the first half when it delivered an EBIT of $41.8 million.

This was seen as a profit downgrade as GWA has a history of producing a stronger second half result.

But Morgans believes that the market is underestimating the group’s performance this financial year with consensus forecasts tipping a 5.2% drop in earnings per share (EPS) for the period.

“Over the past 3 years, 2H EBIT has been on average 9% higher than 1H EBIT,” said the broker.

“The R&R [renovation and restoration] market should be fairly stable and while new housing activity has slowed over the past 12 months, the result should still benefit from a strong backlog of work.”

Another stock that is well placed to benefit from the renovation market is fellow bathroom furnishing group Reece Ltd (ASX: REH).

While Reece has made a major $1.9 billion acquisition of MORSCO Inc to give it a beachhead into the US market, half of its revenue will still be generated in the Australian market.

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Motley Fool contributor Brendon Lau owns shares of Boral Limited. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia has recommended REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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