These Stocks Could Be Too Hot

Marc Courtenay

NEW YORK (TheStreet) -- If you feel the way I do about the housing recovery you're happy as all get-out to see both new and existing home sales rising almost monthly. Homebuilders are feeling more confident as well and new home construction is buoyant.
Builders began construction in December 2012 at a seasonally adjusted rate of 954,000 new homes. That enthusiastic number is nearly double the rate hit during the Great Recession low reached in April 2009. On Wednesday the Commerce Department reports housing starts for January 2013. If that's not enough good news, after a three-day weekend the stock market indices hit new highs across the board, especially new all-time highs in small and mid-cap stocks.

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Still, while many are still quite optimistic about the housing recovery, the majority of economists anticipate the rate of new construction to have ratcheted downward a bit. The question for stock investors is whether that will cool down the home-building related stocks such as Weyerhaeuser WY .
WY has been one of the darlings of the sector and has risen dramatically over the past year, as the following chart demonstrates flamboyantly. Along with the share price I've included the diluted quarterly year-over-year earnings per share so you can see what's driving the price trend. WY data by YCharts

One of the analysts to whom I listen as often as possible is Jim Cramer. As the markets continued to move higher on Tuesday, Cramer and the co-portfolio manager of Action Alerts PLUS, Research Director Stephanie Link, shared some insightful comments on WY, which is a holding in the chartiable trust.
Jim Cramer and Stephanie Link actively manage a real money portfolio for his charitable trust -- enjoy advance notice of every trade, full access to the portfolio, and deep coverage of the latest economic events and market movements.
Among other commentary they wrote that WY "...is a key play on housing ... because management has done a great job positioning the company for positive operating leverage given its past restructuring efforts.

WY Chart
WY Chart

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"As a top Pacific Northwest timberland company (25% of sales), it is in terrific position to benefit from the turn in housing due to the declining supplies from British Columbia, improving Asian export demand and limited exposure to paper producing regions like the South and Northeast.
"In addition, its timberlands are the most productive and valuable among its peers because of its regional exposure in the Pacific Northwest and its wood products business (40% of sales) levers its more than the competition." Any potential or current shareholders of WY love those reasons for ownership.
My caveat is that from both a fundamental perspective (shares selling at 23 times forward, one-year earnings) and from a technical viewpoint, WY may be due for a correction. As recently as Dec. 31, and admittedly connected with the "fiscal cliff" scare, shares traded near the $27 level.
It is also prudent to point out that WY shares are just as likely to test the 52-week high share price of $31.74. If the stock closes above that level it could conceivably form a new top before correcting. Those who care to invest at these levels may want to buy some "insurance" in the form of put options.

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Another high-flyer is Blackstone Group BX , which since Nov. 16 has experienced a 48% skyrocket ride for its share price. BX is a diversified alternative asset management and financial advisory services company. Lately the spotlight has been on its real estate business.
It's been reported by several reputable news services that BX has accumulated an enviable portfolio of houses (three million, approximately) the company bought at distressed pricing and plans to use as rentals. In many areas of the nation there is a shortage of rental houses, and those are the regions BX has been targeting.
The best way to learn about Blackstone Group is to carefully peruse its informative Web site. You can easily find its full-year 2012 earnings report as well as its fourth quarter 2012 results. Personally speaking, I think this company is brilliantly led and operated.
What I want to show you, however, is the five-year chart of the stock's performance. The share price movement looks like a roller-coaster ride, yet its trailing 12-month cash from investing helps me understand why the stock hit a new 52-week high on Tuesday. BX data by YCharts

Shareholders are currently paid a handsome dividend for holding shares of BX. The current yield-to-price is still an impressive 8.77% based on the closing price of $19.15. My concern is this yield represents a payout ratio of over 300%!
Maybe that's based on all the new rent money that will be flowing in during 2013. But it takes time to buy existing houses, prepare them for occupancy and then put them on the market as rentals. When the three million houses are rented and the cash flow starts coming in, the upside on BX should be pretty!
In the meantime, if you own shares, one way you can protect yourself is by using a "stealth" trailing stop-loss system like TradeStops, to which I subscribe. It sends subscribers a timely alert when shares have dropped to your pre-determined stop-loss levels without the market makers being able to see where you intend to sell.
These are exciting times for real estate-related investing. Those who bought shares of BX on the way up should be encouraged. For those who didn't, patience and a reasonable 5% to 10% price correction will open the gate for a more opportunistic buying opportunity. The same can be said for WY. At the time of publication the author had no position in any of the stocks mentioned.
This article was written by an independent contributor, separate from TheStreet's regular news coverage. Make smarter trading decisions and provide investment ideas that could help make you richer. Bryan Ashenberg does the dirty work so you don't have to!