Benefits of a strong housing market to the success of our home improvement and construction stocks

The Commerce Department reported that sales of new homes increased by 12.2% in May, reaching a seasonally adjusted annual rate of 763,000, the highest level since February 2022. The S&P CoreLogic Case-Shiller national home price index showed a 0.5% month-to-month increase in home prices in April, marking the third consecutive month of growth after peaking last June. Additionally, the Conference Board reported that consumer confidence improved more than anticipated in June, reaching its highest level since January 2022. Mizuho Securities analyst Brett Linzey stated that there is a strong correlation between SWK’s stock performance, consumer confidence, and residential market trends. More than 80% of the company’s products are aimed at consumer-related markets. According to a recent survey by JPMorgan, 84% of respondents plan to undertake a repair/remodel project on their homes within the next six months. Of these projects, 63% will be DIY, while the remaining 37% will be carried out by professional contractors.

Stanley Black & Decker is a global leader in hand and power tools, as well as household hardware, making it a go-to choice for completing home renovation projects. Caterpillar, a heavy equipment manufacturer, derives 25% of its construction revenue from residential projects and is expected to experience growth in this segment as North America’s construction sales remain robust. While 75% of Caterpillar’s construction revenue comes from non-residential projects, the increase in residential building permits is likely to drive sustained demand for its machinery. Caterpillar’s Construction Industries segment accounts for approximately 40% of the company’s total sales. D.A. Davidson analyst Michael Shlisky emphasized that the housing market presents numerous opportunities for Caterpillar across its various businesses. New housing developments require the construction of roads, sewers, and utility connections, all of which rely on CAT’s technology and heavy-duty equipment. Furthermore, Shlisky noted that the residential construction sector demands mining materials, in which Caterpillar plays a significant role.

It is worth mentioning that high mortgage rates are causing many Americans to remain in their current homes, while potential renters are waiting for homeownership costs to decrease before entering the market. Stuart Millar, executive chairman at Lennar, acknowledged this “new normal” resulting from the Federal Reserve’s interest rate hikes. However, the substantial gap between housing supply and demand is expected to persist, keeping residential homebuilders like Lennar busy. Miller stated that supply remains scarce, demand for affordable options is increasing, and builders will need to construct more homes to meet the demand. Lennar, alongside other U.S. homebuilders, reached an all-time high on Wednesday.

The robust growth of the housing sector bodes well for our investments in Stanley Black & Decker, Caterpillar, and TJX. SWK is an excellent choice for benefiting from homeowners’ willingness to invest in their properties to increase their value, especially since mortgage rates are currently high. Stanley Black & Decker’s tools and outdoor businesses are its core strengths, and they play a vital role in both new home construction and renovations. As long as there is sustained demand for new homes and ongoing construction projects, Caterpillar’s equipment will continue to be in high demand. We anticipate that the federal infrastructure funds, set to be implemented next year, will further boost CAT’s business. In addition, CAT’s strong cash flow generation and commitment to returning capital to shareholders make it an attractive investment. TJX, with its HomeGoods chain, is well-positioned to benefit from the resilient housing market, as homeowners seek branded goods to furnish their homes at discounted prices. As a discount retailer, TJX is also the go-to place for bargain hunting on clothing, shoes, and apparel. (Jim Cramer’s Charitable Trust is long SWK, CAT, TJX. See here for a full list of the stocks.)

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