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Reinvigorate Your Portfolio With These Housing Plays

October 24, 2012

Stock of the Day

"Will the very thing that led to the collapse also bring us redemption?"

That's what I asked my Emerging Growth readers in our August Issue, and I was talking about the housing market. Back then, we were just hearing the first whispers of the housing recovery and there was plenty of doubt that we had reached the bottom. But armed with the latest housing data, I decided that then was the time for action so I added four housing plays to the Buy List: Two homebuilders, a homeowners' insurance company, and even a mortgage portfolio management company.

Fast forward three months later, and they have delivered us an average 33% in returns. And the mortgage software company I added in June has returned a whopping 63% (More on that later)!

But while I gave my Emerging Growth readers first crack at this profitable trend, there is still plenty of steam left in the housing market recovery.

Take the latest new home sales data, which was released today. Americans ramped up new home buying to the fastest pace in two years—the 389,000 annual pace blew economist estimates out of the water. And last week, both September housing starts and building permits surged to a four-year high.

So it comes as no surprise that the Residential Construction industry's profits are forecast to surge 641% this quarter.  General Building Materials companies are headed towards 73% bottom-line growth. And even Home Improvement stores stand to profit—earnings are expected to rise 29%.

Within these industries, a handful of companies stand to win big. Today, I'm going to run down three of the most promising housing plays that you may want to consider before they announce earnings.

Automating The Home Buying Process

As promised, I first want to talk to that Emerging Growth mortgage software company that has gained 63% since June.

Ellie Mae Inc. (ELLI) is a huge beneficiary from the growing regulatory demands placed on lenders. And that's because its Encompass software handles business and management functions for mortgage originators. In fact, this software is so good that it reduces the average cost per mortgage by $3,000. So it comes as no surprise that between Encompass 360 and its Datatrac software, this company is responsible for handling nearly a third of the national volume of loans.

When you buy shares of ELLI, you're buying into one of the best-performing companies in the Application Software industry. While the rest of the Application Software industry is headed towards just 12.8% earnings growth this quarter, analysts expect Ellie Mae's bottom line to surge 122.2%!

Elli Mae reports earnings after close next Tuesday, and given its track record of stunning earnings surprises, it shouldn't disappoint.

America's Luxury Home Builder

Based in Pennsylvania, Toll Brothers Inc. (TOL) is the fifteenth largest homebuilder in the industry, and it has been on fire lately. This company is known for building luxury homes across 20 states, drawing in $1.5 billion in revenue in the most recent fiscal year. With operations across dozens of major suburban market and metropolitan areas, this company has its finger in several pots, including land developing, golf course management, landscaping services and even mortgage services.

One glance at this Conservative stock's Portfolio Grader page tells you just how far TOL has come in the past year. And while TOL has surged 91% in the past 12 months, its run isn't over by a long shot. This quarter, the company is expected to post 32% sales growth and 167% earnings growth. And given that the past two quarter have brought triple-digit earnings surprises (yes, you read that correctly), I can't wait for its next earnings announcement.

Laying The Foundation For a Recovery

Of course, all of the materials that go into a house have to come from somewhere, and that's where Eagle Materials Inc. (EXP) comes in. This is a top manufacturer of cement, concrete, and drywall. Within the cement industry, Eagle Materials stands out in terms of bottom-line growth, return on equity and its 0.8% dividend yield.

And just like TOL, EXP has vastly improved in the past year. But it's not too late to get in on this stock's incredible run. For its October 29 earnings announcement, analysts expect 24% sales growth and 236% earnings growth. And when we consider that analysts have upped their estimates by nearly 10% over the past three months, I expect this stock to grab headlines when it releases earnings.

In a world where emerging markets are slowing down and Europe is at a standstill, it's refreshing to see bright spots like this in the U.S. economy. Even Mr. Buffett said on CNBC today that the housing market has "turned corner," and I agree. So while these companies announce ballooning profits this quarter, there's no excuse not to get in on the action. And as three A-rated stocks, I consider ELLI, TOL and EXP a great place to start.

Sincerely,

Louis Navellier

Louis Navellier

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