1 Reason to Tread Carefully in This Sector

Stocks tied to consumer spending have been huge winners lately. Thanks to elevated consumer confidence, folks are feeling optimistic and starting to open their wallets. But this news has investors wondering if good stock buys still exist in the consumer goods space.

Dissecting the sector
Just last month, The Conference Board reported that the Consumer Confidence Index hit a five-year high. The real estate recovery is under way, and the job market is slowly rebounding. Despite a payroll tax increase that took effect at the beginning of the year, consumers are loosening the purse strings and feeling good these days. In fact, consumer spending rose at the fastest pace in two years during the first quarter of this year. 

Consumer discretionary stocks, which span industries like autos, apparel, leisure, and media, enjoy more upside during a robust economy and typically outperform the overall market when the economy is purring. For example, from the March 2009 market doldrums to present, the consumer discretionary sector returned 282% versus 175% for S&P 500. So far this year, it's been the best-performing sector, returning nearly 26% versus the S&P 500's 20%. 

Top 5 Growth Stocks To Invest In 2014

Yet investors are getting cautious. Last week, retail sales came in weaker than expected. Also, some of the biggest winners in the consumer discretionary sector are trading at rich valuations. Take Tesla (NASDAQ: TSLA  ) , a stock that's surged an incredible 262% year to date. Many investors feel its current forward price-to-earnings ratio of 136 is both frothy and completely unjustifiable.

Last week, my Foolish colleague Sean Williams both extolled the virtues of CEO Elon Musk's genius and broke down Tesla's crazy valuation. Without a doubt, Tesla has a lot going for it. Musk's commitment is unquestionable, Tesla's technology is game-changing, and the company recently posted a profit. But big competitors are gaining ground in the electric vehicle market. And the infrastructure needed to make electric vehicles a viable and prolific means of transportation is not only lacking, but also years from becoming reality.

Rev up or downshift in this sector?
With huge stock run-ups like Tesla's, some investors feel the gains in the sector are behind them. So should you stay out of the sector completely? In a word: no. Good buys still exist, though it might require a bit more work to find them.

For example, Disney (NYSE: DIS  ) appears to be a good buy. Its stock price is up a more modest 29% so far for the year, yet it boasts an enticing forward price-to-earnings ratio of 16. Disney enjoys a diversified stream of revenues and an ability to produce seemingly endless billion-dollar movie franchises. Its Pixar, Marvel, and Lucasfilm acquisitions are proving successful and generating assets that'll create value for decades to come. In addition, Disney's lucrative cable networks bring in roughly 45% of revenues and two-thirds of annual operating profit. 

Foolish takeaway
By developing a diversified strategy for adding all sectors to your portfolio, a portion of your portfolio will prevail regardless of what happens in the market. But when a specific sector is on a tear, it increases the importance of doing your homework to find high-quality companies with enticing growth prospects whose stocks trade at good values.

Solid companies selling at depressed prices have consistently helped generations of the world's most successful investors preserve capital, minimize risk, and achieve long-term, market-trampling returns. For one such company, read our free report: "The One REMARKABLE Stock to Own Now." Just click here to get started.

1 Winner From the Rise of Internet TVs

The Internet is invading our living rooms. Research firm NPD forecasts that, whether through consoles, streaming boxes, or the TVs themselves, the number of wired devices bringing broadband into homes should jump by 50% in two years -- to 120 million.

Plenty of big tech companies are vying for a piece of that surging market. Apple (NASDAQ: AAPL  ) , for example, has sold millions of its Apple TV streaming devices. And CEO Tim Cook said in May that the company has a "grand vision" around TV but hasn't clued investors in to its plans yet. Microsoft (NASDAQ: MSFT  ) , meanwhile, has made it clear that it wants its new Xbox console to be an all-in-one entertainment hub instead of just a gaming platform. And even Intel (NASDAQ: INTC  )   will be joining the fight with its own set-top box delivering a paid Internet video service this year.

In the following video, Fool contributor Demitrios Kalogeropoulos argues that Netflix (NASDAQ: NFLX  ) may actually be the best positioned to benefit from these battles. As an application, the company's software can be layered onto any popular device, just as it is today with consoles and streaming boxes. And Netflix's membership growth was the strongest over the holiday quarter last year, when consumers were snapping up tablets and smart TVs by the handful. If this holiday season turns into a tech war over Internet-connected living rooms, he argues, then Netflix could end 2013 with a similar bang.

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The television landscape is changing quickly, with new entrants such as Netflix and Amazon.com disrupting traditional networks. The Motley Fool's new free report "Who Will Own the Future of Television?" details the risks and opportunities in TV. Click here to read the full report!

D.R. Horton's Stock Is Set To Soar

The housing prices in US are experiencing a strong upward trend. As expected, a number of viewpoints have emerged regarding the source and impacts of this increase in housing prices over the last year. According to yesterday's reports on Case-Shiller index, the home prices in the US have experienced the strongest upward surge since FY06. The report posted a 10.9% increase in home prices in March on YoY basis. A few analysts have suggested that this increase in prices has not occurred because of an increase in demand for housing but because of increase in investing activity in the housing industry. It is a fact that a number of institutional investors have shown signs of increasing their exposure to the housing market in expectation of further improvement. However, when we consider the report in a holistic economic perspective, the proponents of increased housing activity from actual consumers make a stronger case. The consumer confidence is growing strong through an increase in disposable income and spending trends. The overall economic activity is showing signs of recovery through these changes in the behavior of US consumers. The housing companies, which have been subject to a very slow performance in the three years following the crisis, are expected to benefit the most from this surge in prices. In this situation, we are considering D.R. Horton Inc. (DHI) as a prospective investment in the industry. The company is among the larger players in the industry with a market capitalization of $8.3 billion and net sales revenue of $5.2 billion in FY12.

Stock Performance

The stock price for D.R. Horton remained fairly stagnated before initiating an upswing in early October of FY11. The upward trend has persisted since then and the increase in housing prices suggests that it is far from over.

(click to enlarge)

Source: YCharts

The above chart shows the stock price of D.R.! Horton and the Case-Shiller Home Price Index (Composite 20) since the beginning of FY12. The chart shows that the home price index and the stock price of the company are strongly correlated and both have shown a substantial improvement over the reference period. At the same time, in comparison with the company's competitors, its stock price has not shown a substantial gain.

(click to enlarge)

Source: YCharts

The above chart shows the change in stock prices of D.R. Horton as compared with its peers which include KB Home (KBH), Lennar Corp. (LEN) and Pulte Group Inc. (PHM). The chart clearly represents that over this period the company's stock price has increased by 97.9% whereas other similar stocks have managed to post an increase of more than 200% over this period.

Growth and Financial Stability

In the past few years, the company has been subject to strong deterioration in terms of its growth prospects due to the adverse impacts of the crisis. The housing industry as a whole went through a difficult period and has to suffer tough consequences before looking at a hopeful future outlook. In FY12, the situation started to change. This reversal of expectations with the regards to the company and the overall industry is clearly visible in the financial performance of the company.

(click to enlarge)

Data Source: Morningstar

The above chart shows the total assets of the company over the last five years. The assets demonstrate a consistent deterioration over the period of four years since FY08 but in FY12, a strong recovery has occurred. Going forward, we should expect the recovery to continue as the growth prospects of the housing industry will begin to take momentum.

(click to enlarge)

(click to enlarge)

Source: YCharts

The above charts show the EPS of the company and its debt to equity proportion as compared to its peers since FY10. In the upper portion of the chart, we see that the company has shown stronger per share earnings but these results have not been fully reflected in the stock price of the company as compared to other similar companies. At the same time, the second part of the chart shows that the company's financial risk is limited and much more manageable than its competitors. Out of these four companies, D.R. Horton is the only one with most of its capital based on equity whereas all the other three companies have their capital structure highly levered.

Comparative Valuation

Keeping in view the financial performance and the stock performance of these companies, I suspect that the company will be undervalued as compared to its peers providing a substantial upside potential to investors.

Data Source: Morningstar

The above table shows some key valuation metrics for the four companies, their average and the industry average. The table shows that the industry as a whole is not a high dividend paying industry. More importantly, the table shows that the D.R. Horton is undervalued across all most valuation indicators which allows for a sizable upside potential for the investors.

Conclusion

The housing prices are improving and it is my perspective that the upward surge in prices will continue. Given D.R. Horton's financial performance as compared to its competitors, the company is strategically well positioned to benefit from this improvement in industry outlook. Also, the undervaluation of the stock provides an upside potential to investors; therefore, my recommendation for the stock is 'buy'.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

The Dow's 4 Most Impressive Dividend Growth Stocks

Many investors seek to buy the stocks in the Dow Jones Industrials (DJINDICES: ^DJI  ) because they represent the cream of the crop of the U.S. stock market. Yet all 30 stocks in the Dow also share an important trait: they all pay dividends to their shareholders.

Still, dividend investors have gotten increasingly picky about the stocks they choose to meet their income needs, and one important element of making choices for a dividend portfolio is finding stocks that don't only pay healthy dividends now but will also continue boost their payouts in future years. That's why this article highlights four stocks that have made massive increases in their dividend yields since the market last hit record highs back at the end of 2007. Let's look at those four stocks.

Hewlett-Packard (NYSE: HPQ  )
As of the end of 2007, HP stock had a dividend yield of just 0.6%, but in the years since then, the yield has more than tripled to its current level of 2.2%. What makes that yield all the more impressive is that the stock has bounced sharply this year, gaining more than 80% and therefore cutting the yield almost in half from the 3.7% level it boasted at the beginning of 2013. HP had paid the exact same quarterly dividend for more than a decade until it made a 50% boost in its payout in mid-2011, recognizing the value of returning more cash to shareholders. Even through tough times last year in the midst of multiple failures in past efforts at restructuring, HP kept paying dividends, and now that the stock appears firmly on the comeback trail, investors increasingly believe that focusing on more profitable business lines could produce even greater dividend growth.

Intel (NASDAQ: INTC  )
Chip giant Intel has gone from a typical tech stock to a Dow dividend giant, with its yield having risen from 1.7% at the end of 2007 to 3.9% today. The company has doubled its dividend over that period of time, but the other part of the yield equation hasn't been as kind to investors, as Intel's share price has actually fallen over that period. Intel had the financial strength to withstand the market meltdown, but its ongoing struggles to adapt to the mobile revolution haven't resulted in the growth that investors would prefer to see. Until the company can capitalize more fully on newer technology, Intel's status as a mature tech company with more prospects for dividend income than future growth could hold the stock back.

ExxonMobil (NYSE: XOM  )
The oil giant's dividend has risen from just 1.5% in 2007 to 2.7% today, with an 80% rise in per-share dividends accounting for pretty much the entire increase in its yield. Energy prices remain reasonably strong, with oil still trading at triple-digit levels despite huge production gains from unconventional drilling practices. Yet despite the powerful earnings that the favorable energy environment has produced, ExxonMobil still struggles with the need to replace declining production from older wells with new finds that are large enough to make a significant different in its total business. Combined with share buybacks, Exxon returns more capital to shareholders than any other company, and that's likely to continue as long as Exxon doesn't find the need to make a massive strategic acquisition that uses up its available ash.

Microsoft (NASDAQ: MSFT  )
Microsoft has boosted its dividend yield from 1.2% in 2007 to 2.9% today, with its quarterly dividend having more than doubled. Like Intel, Microsoft has seen struggles in producing sizable growth from its core business in a world in which PC demand has started to decline dramatically. Yet by returning more capital to shareholders, Microsoft reminds investors that its legacy businesses still generate huge amounts of cash, and even if they're in decline, they'll likely keep rewarding dividend recipients for years to come. If the company's planned restructuring can reinvigorate its product innovation, moreover, Microsoft could finally reawaken growth to go with its solid dividends.

Accept only the best
The best stocks offer not only good yields but improving payouts. By focusing on the stocks that will give you favorable dividend characteristics, you'll reduce your chances of being disappointed by the dividend stocks you own.

Dividend stocks can make you rich. It's as simple as that. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of the only nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

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