Three stocks to benefit from a strong housing market

The housing market on both sides of the U.S.-Canada border is showing signs of a rebound, recovering from last year’s slump. The ongoing resurgence is positive news for many companies in the real estate and related industries in both countries.

In Canada, the number of homes sold jumped 3.6% in April, while sales from a year ago are up 4.2%, according to the Canadian Real Estate Association. In a similar trend, U.S. home sales rose 4.5%, to hit one-and-a-half-year high, according to Reuters. Positive economic fundamentals such as higher employment numbers, rise in immigration both stateside and in Canada, and low borrowing costs are expected to continue to support the real estate industry.

When housing demand rises, it spurs homebuilding activity which improves profitability for companies that are tapped into the real estate market. The following companies represent attractive investment opportunities as they tend to benefit from growing demand for their goods and services when the housing market springs to life, according to Morningstar equity research.

Norbord (OSB) is the largest global producer of oriented strand board (OSB), which is used as a structural panel in construction, repair and renovation of homes. Most of its mills are in North America and Europe.

The company’s products are expected to be in greater demand as the residential construction market starts to turn after seven lean years. Favourable demographics, a tighter labour market, and looser mortgage availability will continue to drive improvement in homebuilding activity for the next decade, according to a Morningstar equity report.

On a cautionary note, though, despite forecast for growth in homebuilding activity, available supply creates a drag in North American panel markets, as do suppressed prices. However, the weakness in North American market last year was offset by “robust demand growth in Europe, which drove volumes higher by 15% versus the fourth quarter,” says Morningstar equity analyst Charles Gross, adding that “pricing will begin to improve beyond 2019 again, as homebuilding gradually climbs.”

A leading brand and service platform in the commercial real estate industry, Jones Lang LaSalle (JLL) provides a wide range of real-estate-related services to owners, occupiers, and investors worldwide. Its investment management arm manages nearly US$60 billion for clients across diverse public and private real estate strategies.

JLL has an impressive track record of expanding its brand and global service platform while maintaining robust returns on invested capital relative to its cost of capital. Given its stellar history, “JLL will continue to capture disproportionate market share of the increasing long-term demand for commercial real estate services and create shareholder value,” says a Morningstar equity report.

“As continued urbanization drives demand for institutional real estate and real estate services globally, we expect outsize growth for especially trusted and recognizable institutional firms such as JLL,” says Morningstar equity analyst, Yousuf Hafuda, who recently raised the stock’s fair value from US$165 to US$185, prompted by organic growth and market share gains.

The wide-moat firm is purposefully pivoting toward the more stable, necessity-based property and facilities management businesses. “These segments proved resilient through the last downturn as outsourcing has grown, and they allow JLL to develop its relationships and profitable cross-selling opportunities, driving robust organic growth, fortifying its wide moat, and putting it in an even better position to navigate future volatility,” notes Hafuda.

Ventas (VTR) owns a diversified healthcare portfolio of over 1,100 properties in the U.S., Canada and the UK. One of the bigger U.S. health-care real estate investment trusts, it operates senior housing, hospitals and medical office buildings. The company’s portfolio includes mortgages and other loans, contributing about 3% of net operating income (NOI).

The top healthcare real estate stands to disproportionately benefit from the Affordable Care Act, nicknamed Obamacare. “With an increased focus on higher-quality care being performed in lower-cost settings, the best owners and operators in the industry that can provide better outcomes while driving greater efficiencies should see demand funnelled to them from the best healthcare systems,” says a Morningstar equity report.

Moreover, the company benefits from favourable demographic trends, particularly the baby boomers entering senior years when healthcare spending spikes. “Long-term, the best healthcare companies are well-positioned to take advantage of these industry tailwinds,” says Morningstar equity analyst, Kevin Brown, adding that Ventas is particularly well position to benefit “due to its portfolio of high quality assets connected to top operators.” He pegs the stock’s fair value at US$64, and remains optimistic about the senior housing sector’s longer-term prospects “given that construction starts in 2018 are less than half of the peak seen a few years ago and the demographic boon is only a few years away.”