After ten consecutive interest rate rises, the real estate sector is looking worse for wear compared to just a year ago.
To demonstrate, the S&P/ASX 200 Real Estate (ASX: XRE) index is more than 22% down since the start of last year.
"Monetary tightening has adversely impacted the housing market (in the US and domestically), with higher mortgage rates ultimately translating to softer house prices and a decline in new housing construction volumes," said Wilsons equity strategist Rob Crookston.
However, Crookston indicated in a memo to clients that his team would buy a pair of S&P/ASX 200 Index (ASX: XJO) shares that are exposed to the sector.
"Buying stocks when sentiment is very low can be an astute way to generate returns," he said.
"This is called contrarian investing."
Besides, the rate outlook is starting to turn anyway.
"The macro is starting to shift in the US and in Australia, with central banks looking close to the end of tightening cycles," said Crookston.
"There are strong structural tailwinds behind the US and Australian housing markets."
'An attractive investment' right now
The obvious current pick for the Wilsons team is construction materials provider James Hardie Industries plc (ASX: JHX), which has a significant US business.
"We view James Hardie as an attractive investment at this juncture," said Crookston.
"In the current challenging backdrop, James Hardie's earnings have held up relatively well (expected to be broadly flat in FY23) while it has been able to pass on higher prices to help offset rising costs."
Besides, the quiet housing market could end up being "an opportunity".
"We think James Hardie is well placed to take advantage of market softness to strengthen its market position and drive further profitable volume share gains."
The James Hardie share price has declined more than 40% since the start of last year.
The Wilsons team reckons the sell-off is overdone.
"James Hardie currently trades on a price-to-earnings ratio (PE) of 17x, which is 1 standard deviation below its 10-year average," said Crookston.
"Notwithstanding the immediate headwinds, we think James Hardie is very attractively valued for 'patient capital' considering its long-term structural earnings growth potential underpinned by sector tailwinds."
But this stock for 'growth at value prices'
Crookston's second pick is more of a surprise.
It might not be immediately apparent that television station owner Nine Entertainment Co Holdings Ltd (ASX: NEC) would have any connection to the fortunes of the real estate market.
But Wilsons analysts pointed out that it owns 60% of online classifieds site Domain Holdings Australia Ltd (ASX: DHG).
"Domain should benefit from higher house prices and as there tends to be more churn in the real estate market as buyers and sellers look to take advantage of favourable conditions," Crookston said.
"The key for Domain is that, as property sales prices or rents increase, it can result in higher commissions and fees for Domain. This can help to boost the company's revenue and profitability."
So why not just buy Domain shares instead of Nine Entertainment?
"Nine has a diverse portfolio of assets including television broadcasting, digital media, and publishing," said Crookston.
"The company's broad range of media offerings could help to mitigate risks associated with any one area of the business."
Wilsons analysts have deemed that Nine shares are currently offering "growth at value prices".
"An investor can buy Nine Entertainment at a FY24 PE of 11x, providing a cheap price to get leverage to Domain."
There is a tidy bonus as well, while investors wait for the housing market to turn.
"Nine has an expected FY23 dividend yield of 5.7% fully franked."
