As if it wasn't clear enough, recent housing data continues to paint a mostly bleak picture. New home sales ticked in at a nine-month low during August as median and average selling prices dropped sharply. Surprisingly, existing home sales improved last month, yet housing starts fell 5%, cancellations remain very high and tight credit is marginalizing potential buyers. Can paint stocks like The Valspar Corporation (NYSE:VAL) and Sherwin-Williams Company (NYSE:SHW) shine without a sustained housing rebound?

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Paint Stocks in a Bad Housing Market
Even with mortgage rates hovering around near record lows, investors shouldn't expect housing to provide a stimulus to equity markets anytime soon. Consumer confidence remains very soft, and an impending change to conforming loan limits beginning in October will be just another headwind working against a recovery.

The big problem is foreclosures; default notices surged a staggering 33%, sequentially, during August. That's the biggest increase since August 2007. The housing mess - persistent oversupply due in large part to a dogged glut of foreclosures - isn't going anywhere.

Strangely enough, paint producer stocks really aren't reflecting the undeniable problems in the housing market. Over the past month, shares of Valspar, Sherwin-Williams and diversified paint producer PPG Industries Inc. (NYSE:PPG) were are all roughly flat. Considering all of the bad news coming out of the housing market, there appears to be a disconnect. Only H.B. Fuller Company (NYSE:FUL) and chemical and paint manufacturer RPM International Inc. (NYSE:RPM) are deep in the red this month. The paint segment was underperforming before September, with all of the major stocks down 6% or more year to date. So, what has happened within the past month that would be positive catalysts for the group? It was understandable for paint stocks to rally ahead of, say, implementation of the $8,000 first time home buyer tax credit that ended last year. The housing backdrop simply has more shades of red than green right now.

Inflation Eating Away at the Paint?
Investors will be waiting for the paint on the walls to dry if they are looking for a housing market turnaround. More importantly, costs have been steadily rising. Paint producers have been forced to raise prices to offset higher raw material costs. Last quarter, higher charged prices helped Sherwin-Williams record a 10% increase in revenues. However, profits dipped 1% as the cost of goods sold rose 14%.

Likewise, H.B. Fuller saw unit volume sales sink during the third quarter because of higher price points needed to maintain margins amid elevated costs. That means H.B. had to charge higher prices to make a similar amount of money because material costs increased. Even though the Minnesota-based paints, adhesives and sealants producer generated earning in-line with estimates at $23.2 million, H.B. Fuller guided down the top range of its earnings forecast due to higher-than-expected costs and a difficult demand environment.

The Bottom Line
Margin pressures are a major concern for paint retailers, including Benjamin Moore Paints which is owned by Berkshire Hathaway Inc. (NYSE:BRK.A). Paint companies will have to continue to aggressively manage costs and pricing. On the bright side, several companies in the group pay attractive dividends, particularly RPM International which yields an outstanding 4.6%. In all likelihood, these yields may only get better as paint stocks better reflect the glaring streaks in the housing market. (For additional reading, take a look at 4 Key Factors That Drive The Real Estate Market.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Home & Auto

    Economics of Owning a Rental Property

    Learn how to find suitably priced rental property and the right rent level. Determine what maintenance costs to expect and what tax breaks are available.
  2. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  3. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  4. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  5. Home & Auto

    5 Mistakes That Make House Flipping A Flop

    If you're just looking to get rich quick, you could end up in the poorhouse.
  6. Home & Auto

    Rent-To-Own Homes: How The Process Works

    Here's what to watch for when negotiating a contract for a rent-to-own home – and who is a good candidate for this option.
  7. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  8. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  9. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  10. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center