TREX - Three Home Improvement Stocks Primed to Outperform in the Second Half of 2020

The coronavirus has caused disruptions to various parts of the economy, but it’s lit a fire under the housing market. We’re seeing a surge in demand due to city-dwellers escaping for the suburbs and rural areas. Already, the housing supply is at low levels.

Another bullish factor is the record-low level of mortgage rates. This makes houses more affordable, spurring demand. It’s also supportive of homeowners financing upgrades of their homes and having confidence that their investments will result in increased home values.

The coronavirus is also leading to changes in household spending. It’s shifting away from travel and towards home improvement. As the housing market continues to gain strength, this theme will intensify. These home improvement stocks are well-positioned to thrive in the second half of 2020.

Sherwin-Williams (SHW)

Painting a room or the outside of the house is the simplest and easiest form of home improvement. Additionally, any type of renovation or addition entails new layers of paint. This is a catalyst for SHW given current trends.

Another bullish factor is that the main ingredient of paint is oil. Given that travel is going to be depressed for the rest of the year, demand for oil will be impaired, meaning that prices will be capped.

This creates an ideal situation for SHW. Demand for its product will increase, while the cost of its input is not going to significantly increase. SHW has been one of the best-performing stocks since the housing market decisively bottomed out in 2012, as it’s up more than five-fold since then, while it paid out a dividend higher than the 10-year Treasury note.

SHW’s POWR Ratings are consistent with this outperformance. The stock is rated a “Strong Buy”. It also has an “A” rating across the board in all categories including Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank.

Trex (TREX)

Another aspect of home improvement is by upgrading outdoor living spaces. This is particularly popular with Millennials who place a higher priority on it than previous generations and make up the bulk of new, homebuyers.

One beneficiary of this trend is TREX which makes wood and plastic composite material that is used in making decks. The stock is up more than 100% since the March bottom, and it’s 2% off its all-time high. TREX is growing revenues by 11% while maintaining 42% gross margins.

Trex has an overall POWR Ratings of “B”. It has an “A” rating for Peer Grade and Trade Grade, a “B” rating for Buy & Hold Grade, and a “C” for Industry Rank. It’s ranked the #4 stock in the Industrial - Building Materials group.

Floor & Decor (FND)

FND IPO’d in 2017 since then the stock has been range-bound between $25 and $60. However, the strength in housing could be the catalyst for it to break higher.

(source: Finviz.com)

FND is a multi-channel retailer of flooring products such as tile, wood, laminate, vinyl, and natural stone. The stock is in expansion mode as it expects to expand to 400 stores from its current, 120, over the next five years. It’s currently in a sweet spot as same-store sales are increasing, the number of locations is increasing, and online sales are exploding.

Overall, revenues are increasing by 16% with 42% gross margins. Its stock is 5% off its all-time high. FND’s POWR Ratings are also impressive with an overall “Buy” Rating. It has an “A” in all categories, except for a “B” in Buy and Hold. It’s also ranked #13 in the Home Improvement Goods category.

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SHW shares were unchanged in after-hours trading Monday. Year-to-date, SHW has declined -2.53%, versus a -4.48% rise in the benchmark S&P 500 index during the same period.

About the Author: Jamini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. As a reporter, he covered the bond market, earnings, and economic data, publishing multiple times a day to readers all over the world. Learn more about Jaimini’s background, along with links to his most recent articles.

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