Sectors such as housebuliders have re-rated significantly over the course of the year as the UK housing market has strengthened. For example, Barratt Developments, Persimmon and Galliford Try have all returned more than 50 per cent in 2013.
Performance of stocks year-to-date
Source: FE Analytics
Gervais Williams, manager of the CF Miton UK Multi Cap Income fund, is now looking for stocks that are set to benefit from the next stage of the recovery; he says there are a number of opportunities in companies that concentrate on home improvement, for example.
Here are five companies whose share price could re-rate if the housing market continues to strengthen.
Marshalls
Although Williams was unable to comment on the specific stocks he was buying, he says that Marshalls is a company that would benefit from an uptick in the housing market.
Williams points out that if someone sees the value of their home appreciate, they may be more inclined to spend on renovations or an extension. He says that Marshalls, a manufacturer of natural stones and landscaping products, could represent a good way of playing this theme.
The West Yorkshire-based firm has a market cap of £344m and is probably best known for working on large-scale projects such as the creation of the Olympic Village and London’s Exhibition Road.
Performance of stock over 1yr
Source: FE Analytics
Shares in Marshalls were hit particularly hard during the financial crash; however, it has recovered to some extent recently. According to FE Analytics, it has returned more than 100 per cent over the last 12 months.
Howden Joinery
Williams says Howden Joinery is another stock that could soon experience a re-rating if homeowners begin to spend more.
The £2bn FTSE 250-listed company is a leading supplier of kitchens and joinery products to small builders. It has more than 500 depots across the UK.
It has already had a good run, returning close to 100 per cent over one year and 30 per cent over six months.
Steve Davies, co-manager of the Jupiter UK Growth fund, expects it to continue to perform well.
"We believe that the outlook remains bright for companies exposed to the UK domestic market, including retail banks such as Lloyds and retailers such as Dixons, Howden Joinery and WH Smith, as well as Countrywide and Taylor Wimpey in the housing sector and ITV in the media."
"All of these remain substantial holdings in the Jupiter UK Growth Fund," he added.
FE Alpha Manager Richard Plackett’s BlackRock UK Special Situations fund is one of 23 portfolios that count Howden Joinery as a top-10 holding.
Kingfisher
Richard Hunter, head of equities at Hargreaves Lansdown, says that FTSE 100-listed Kingfisher is another stock that could soon experience a pick-up in performance.
"It should do well as B&Q is part of its stable. The market views Kingfisher as a cautious buy so that would be one of the first companies to look at," Hunter said.
Kingfisher focuses on home improvement products such as tools, hardware, and garden supplies and plants.
As well as B&Q, it owns Screwfix, a direct and online supplier of trade tools, accessories and hardware products.
The stock has already performed well so far this year, having returned more than 34 per cent since January. However, shares in Kingfisher have fallen recently as the management team warned the market that profits had fallen slightly over the summer months.
Performance of stock year-to-date
Source: FE Analytics
Our data shows that nine funds in the IMA universe count Kingfisher as a top-10 holding.
Travis Perkins
Hunter also thinks builders merchant Travis Perkins could perform well.
Martin Cholwill, manager of the five crown-rated Royal London UK Equity Income fund, does not invest in Travis Perkins because its dividend yield is too low for his strategy, but he says it is a good choice for more growth-oriented investors.
"If people see rising house prices then they are more likely to have an extension built, because they are more likely to invest in an asset whose price is going up. Building materials companies, like Travis Perkins, could do well as jobbing builders use their products," he said.
Travis Perkins is listed on the FTSE 100 and has a market cap of £4.4bn. As well as its external builders merchant business, it also has a home improvement retail arm.
Like Marshalls and Howden Joinery, Travis Perkins shareholders have been well-rewarded this year: the stock has returned in excess of 70 per cent year-to-date.
Four funds in the IMA universe count Travis Perkins as a top-10 holding, including FE Alpha Manager Nigel Thomas's £4.3bn AXA Framlington UK Select Opportunities fund.
Wolseley
Anthony Rayner, portfolio analyst at Darwin Investment Managers, says the strengthening housing market is a theme he and David Jane are playing in the TM Darwin Multi Asset fund.
Although the fund holds Kingfisher for its exposure to the strengthening UK house market, Rayner also highlights the FTSE 100-listed Wolseley as another alternative.
"In the US we own Home Depot and in the UK we own Kingfisher, as both their fortunes are fairly strongly influenced by housing market transactions," Rayner said.
"Brokers are pushing Wolseley – which is a supplier of plumbing materials – and Kingspan – which makes low-energy products for the construction industry. However, the last time I looked at Kingspan it was quite pricey."
Wolseley has a market cap of close to £10bn. It issued a £300m special dividend at the start of the month after announcing its earnings were up by 8 per cent in 2013.
Investors in the plumbing supplier have seen more modest returns over the last year than some of the other stocks mentioned in this article. However, with returns of more than 30 per cent it has hardly disappointed either.
Performance of stock over 1yr
Source: FE Analytics
Ten funds hold Wolseley in their top-10, including AXA Framlington UK Select Opportunities.
