The Best Ways to Play the Housing Rebound

Investors seeking smart plays in the housing rebound may want to check out the home improvement space.

Shares of Lumber Liquidators (NYSE: LL  ) hit new all-time highs this morning after delivering another strong quarter.

Net sales soared 21% to $210.7 million in the hardwood flooring retailer's fourth quarter, fueled by modest expansion but largely as a result of an exciting 13.2% spike in comparable-store sales. Comps rose as the number of customers invoiced at a typical store rose 9% and the average sale increased 4%.

With home prices finally starting to firm up and homeowners growing less worried about their mortgages going underwater, it's only natural to see an uptick in folks replacing scruffy carpeting with stylish hardwood planks.

The path down the income statement gets even better. Improving margins led to net income soaring 63% to $13.8 million or $0.50 a share. Analysts were only targeting a profit of $0.42 a share on $197.8 million in net sales.

The future is rosy. Lumber Liquidators has just 288 stores, and it sees a market that can support 600 locations. Margins will be challenged in 2013 as the company rolls out a new store format with an expanded showroom, but the retailer still sees net sales growing 9% to 13% with earnings per share climbing 13% to 28%.

Hit the deck
It's not just Lumber Liquidators impressing the market this week.

Shares of Trex (NYSE: TREX  ) soared 6% yesterday, hitting eight-year highs after a blowout quarterly report. The leading provider of wood-alternative decking may have posted an adjusted deficit of $0.13 a share and seen revenue dip 10% to $46.2 million, but the results were better than expected.

This is also a seasonal business. Folks don't start investing in a new or replacement outdoor deck until spring kicks in, and that's where the news is even more encouraging. Trex is targeting revenue of $107 million for the current quarter, ahead of the $105.8 million that Wall Street was projecting and a return to double-digit year-over-year growth.

Trex has grown by expanding its global presence. Its products have gone from being offered in just three countries in 2008 to 29 countries just five years later. The eco-friendly company has also grown by expanding its product lines across several price points.

It's a sound strategy that's clearly starting to pay off now that homeowners are comfortable enough to spruce up their homes again.

An army of orange aprons
Investors may not think about Trex and Lumber Liquidators when they embark on home improvement plays. The mainstream wagers will be Home Depot (NYSE: HD  ) and Lowe's (NYSE: LOW  ) , as the two superstore chains offer a way to play all aspects of the recovery. From gardening tools to lighting fixtures, the two leading "do it yourself" retailers offer a less concentrated way to play the rebound.

It's not the smart play here, though.

Analysts see Home Depot and Lowe's growing net sales at a mere 3% clip in this new fiscal year. Lumber Liquidators and Trex -- as specialists in popular improvement projects -- are growing considerably faster.

None of the four companies may seem cheap by the market's popular P/E measuring stick. Home Depot, Lowe's, and Trex are all trading at 19 times this new year's projected profitability. Lumber Liquidators -- as the speedster in the group -- is actually fetching more than 30 times the midpoint of this year's net income guidance.

It's not just about this year's growth rates. Traditional discount department store chains continue to expand their housewares and lawn centers.

We also can't forget about the Internet. While online retailers may be challenged in selling hefty dishwashers or offering same-day delivery of tarps after a roof-busting storm, cheaper dot-com pricing on thermostats and chandeliers will eat into the foot traffic at your local hardware store.

Sure, the "showrooming" effect won't be as hard on Home Depot and Lowe's as it will be on consumer electronics chains, but it will eat into sales.

Lumber Liquidators is a brick-and-mortar outfit too, but replacing living areas with hardwood requires more hand-holding than simply ordering a new garden hose.

Trex actually makes its own decking and related materials that it resells through several distributors, so it will hold up just fine.

Bet on the house
No matter where you stand on any of these four companies, the home improvement market will grow. There have been years of pent-up demand, and it's just now starting to get cooking.

The bank is less likely to foreclose on a home -- and homeowners are more likely to be current on their mortgage payments -- in a climate of rising prices and fewer underwater mortgages.

As homeowners grow more comfortable in the freedom to customize their properties, home improvement is a smarter bet than buying into the actual homebuilders, who will only benefit if the appetite for new construction accelerates.

Improve your home. Improve your portfolio.

Beyond housing
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