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Gimme Shelter: Getting In on the Housing Rebound

By Greg Pugh on October 16, 2012

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The US housing market is rebounding. Sales volumes continue to rise, prices are stabilizing and the inventory of homes is shrinking, helped by a significant rise in short sales after restrictions on foreclosures were lifted.

In September, a key US housing-market indicator jumped to its highest level since June 2006 (the National Association of Home Builders/Wells Fargo Housing Market Index). And the stocks of homebuilders have gone through the roof in the past 12 months: Lennar Corp is up 175 percent; D.R. Horton (NYSE: DHI) up 140 percent; and Pulte Group (NYSE: PHM) has tripled in value. The S&P 500’s 12-month gain—28 percent—seems tepid in comparison.

US banks have also been major beneficiaries, due to the mortgage refinancing and origination activity spurred by historically low interest rates. JPMorgan Chase just reported record quarterly profits for the three months ended in September, including a 29 percent in loan origination business. And for this same period, Wells Fargo’s (NYSE: WFC) profit jumped 22 percent.

No wonder Wall Street continues to have a positive outlook on both housing and bank stocks. But we think better values can now be found in niche housing plays, especially those in mortgage-related services.

Title King

As a niche play on a continued rebound in housing, we especially like Stewart Information Services (NYSE: STC). STC sells title insurance through its Stewart Title, National Title and other market-leading subsidiaries, and its policies are distributed by more than 8,500 offices and independent agencies in the US and abroad (including Mexico, Canada, Australia, eastern Europe and the UK).

Unlike most insurance, which covers future losses, title insurance protects against past problems with titles, something that virtually all real estate investors need and want. So STC’s clients span the housing industry: homebuyers and sellers; residential and commercial real estate brokers; mortgage lenders and servicers; title agencies and real estate attorneys; home builders; and the US and foreign governments. 

For second-quarter 2012, STC posted earnings of $24.91 million, or $1.05 in earnings per share (EPS), up sharply from $0.28 in EPS in the year-ago period. On average, analysts polled by Thomson Reuters expected the company to report EPS of only $0.36 for the quarter. For next year, analysts now expect a 65 percent rise in EPS.

Revenue for second-quarter 2012 rose close to 20 percent, to $483.71 million, helped along by a 16 percent increase in title operations and an 80 percent in real estate information (REI) services.

While STC’s stock price is up 131 percent in the past 12 months, it still trades below book value, with a 0.91 price-to-book ratio. And at a recent price of 21.23, STC has an Equity Summary Score of 9.8 out of 10, indicating a VERY Bullish outlook. Our 12-month price target for STC is 28.

Methodology: Our Equity Summary Score (ESS) consolidates the equity ratings provided by 10+ independent research providers. The ESS universe is the 1,500 largest US stocks by capitalization. We analyze each provider’s past advice regarding each stock based on their buy, sell and hold signals, in terms of (1) performance and (2) accuracy. The resulting scores for each provider are then used to weight the provider’s current recommendations for each stock, and the overall results are then ranked against those for all other stocks to arrive at a standardized Equity Summary Score—on a scale of 0.1 to 10.

What do you think of this article? Please post your feedback in the “comments” section below!

Greg Pugh, an income-investing expert, publishes a newsletter called
Investing for Monthly Income.

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