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2 Real Estate Development Stocks to Avoid Amid Industry Woes
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The Zacks Real Estate – Development industry constituents’ performances are likely to be affected by rising interest rates and inflationary pressure, which have an adverse impact on buying power. Moreover, multiple disruptions in the supply chain are resulting in a shortage in construction materials, in turn leading to a rise in material costs. The shortage of skilled labor is making the situation worse. In such a gloomy environment, it would be prudent to stay alert and avoid stocks like LGI Homes, Inc. (LGIH - Free Report) and Forestar Group Inc. (FOR - Free Report) , which could bear the brunt.
Nevertheless, the industry is likely to get some support from rising demand for a number of property types and the availability of ample capital for real estate investment. The pandemic-induced behavioral changes of consumers offer scope to reconsider the optimal usage of real estate. Also, real estate developers striving toward digital transformation at job sites and in the back offices will go a long way in enhancing operational resilience.
About the Industry
The Zacks Real Estate – Development industry includes companies that are mainly engaged in owning, developing and managing a variety of real estate properties, including commercial, residential and mixed-use parcels. While some developers undertake construction on their land holdings to eventually sell the properties to homebuilders, retaining the same for conducting operations is also a common practice. Some industry participants actively undertake strategic activities, such as infrastructure improvement, along with land planning and development to boost economic development, attract quality job creators and diversify the regions in which the firms operate. These firms provide real estate leasing, stewardship, underwriting, planning and entitlement services. Real estate development companies are chiefly classified as financial ones, not construction firms.
What's Shaping the Future of the Real Estate Development Industry?
Rising Interest Rates and Inflation to Affect Business: Rising interest rates and the inflationary environment are likely to have an adverse impact on this industry’s performance. This is because both impact buying power and as a result, many potential buyers are either pausing or reconsidering their purchase decisions. Debt markets are adhering to a cautious stance and there is also an increase in underwriting requirements, affecting transaction activities.
Supply-Chain Woes, High Material Costs & Labor Market Tightness: Multiple disruptions in the supply chain are causing a crunch in construction materials, in turn prompting a rise in material costs. The shortage of skilled labor is adding to the woes. These supply-chain issues and tightness in the labor market are prolonging the development cycles in a number of markets. Until the global supply chain constraints ease, continued cost inflation and building material shortages are likely to persist.
Improving Real Estate Market Makes Room for Growth: The values of a number of property types, including industrial and apartment, have been improving with the strengthening economy. The pace of deterioration in other asset categories has moderated considerably. The unleashing of pent-up demand and substantial availability of capital for real estate investment will likely expedite the rise in property prices, keep the market buoyant and support development activities. Digital transformation efforts to optimize operations will remain a key focus. Moreover, real estate developers are well poised to capitalize on consumers’ behavioral changes triggered by the pandemic. The e-commerce boom and supply-chain strategy transformations are spurring demand for industrial spaces. Demand for retail real estate spaces in high-traffic corridors is also improving as retailers that are able to beat the pandemic blues are now eyeing expansion. Flight-to-quality might accelerate development activities for offices and real estate.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Real Estate Development industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #237, which places it in the bottom 5% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Since May 2022, the industry’s earnings estimates for the current year have been revised 4.4% downward to $5.40. For 2023, the industry’s earnings estimates have moved 8.5% south to $4.18 over the past year.
Before we present a few stocks that you may want to avoid for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Underperforms Sector and S&P 500
The Zacks Real Estate – Development industry has underperformed the S&P 500 composite and the broader Finance sector in the year so far.
The industry has declined 39.6% during this period compared with the S&P 500 composite’s fall of 15.4% and the broader Finance sector’s decline of 13.1%.
Year-to-Date Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price-to-earnings (P/E), which is a commonly-used multiple for valuing real estate development companies, we see that the industry is currently trading at 3.53X compared with the S&P 500’s 17.52X. The industry is trading below the Finance sector’s forward 12-month P/E of 13.66X. This is shown in the chart below.
Forward 12-Month Price-to-Earnings (P/E) Ratio
Over the past five years, the industry has traded as high as 35.16X and as low as 2.85X, with a median of 15.17X.
2 Real Estate Development Stocks to Avoid
LGI Homes, Inc.: The company engages in the design, construction and sale of homes in the United States. LGI Homes is likely to bear the brunt of rate hikes as many potential buyers are either pausing or reconsidering their purchase decisions. Moreover, continued cost inflation is likely to affect performance.
LGI Homes caries a Zacks Rank #4 (Sell) at present. The Zacks Consensus Estimate for 2022 EPS has been revised 2.7% downward to $18.64 over the past two months. Moreover, the consensus mark for 2022 revenues is pegged at $2.94 billion, suggesting a year-over-year decrease of 3.5%. The company’s shares have declined 17.5% over the past six months.
Forestar Group Inc.: This residential lot development company focuses on investments in land acquisition and development. The major portion of the company’s real estate projects is single-family residential communities. Forestar Group’s performance in the near term is likely to be affected by the current market conditions, development delays and moderation in housing demand.
FOR carries a Zacks Rank of 5 (Strong Sell) at present. The Zacks Consensus Estimate for fiscal 2022 EPS has been revised 17.6% downward to $3.05 over the past two months. The company’s shares have declined 23.7% over the past six months.
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2 Real Estate Development Stocks to Avoid Amid Industry Woes
The Zacks Real Estate – Development industry constituents’ performances are likely to be affected by rising interest rates and inflationary pressure, which have an adverse impact on buying power. Moreover, multiple disruptions in the supply chain are resulting in a shortage in construction materials, in turn leading to a rise in material costs. The shortage of skilled labor is making the situation worse. In such a gloomy environment, it would be prudent to stay alert and avoid stocks like LGI Homes, Inc. (LGIH - Free Report) and Forestar Group Inc. (FOR - Free Report) , which could bear the brunt.
Nevertheless, the industry is likely to get some support from rising demand for a number of property types and the availability of ample capital for real estate investment. The pandemic-induced behavioral changes of consumers offer scope to reconsider the optimal usage of real estate. Also, real estate developers striving toward digital transformation at job sites and in the back offices will go a long way in enhancing operational resilience.
About the Industry
The Zacks Real Estate – Development industry includes companies that are mainly engaged in owning, developing and managing a variety of real estate properties, including commercial, residential and mixed-use parcels. While some developers undertake construction on their land holdings to eventually sell the properties to homebuilders, retaining the same for conducting operations is also a common practice. Some industry participants actively undertake strategic activities, such as infrastructure improvement, along with land planning and development to boost economic development, attract quality job creators and diversify the regions in which the firms operate. These firms provide real estate leasing, stewardship, underwriting, planning and entitlement services. Real estate development companies are chiefly classified as financial ones, not construction firms.
What's Shaping the Future of the Real Estate Development Industry?
Rising Interest Rates and Inflation to Affect Business: Rising interest rates and the inflationary environment are likely to have an adverse impact on this industry’s performance. This is because both impact buying power and as a result, many potential buyers are either pausing or reconsidering their purchase decisions. Debt markets are adhering to a cautious stance and there is also an increase in underwriting requirements, affecting transaction activities.
Supply-Chain Woes, High Material Costs & Labor Market Tightness: Multiple disruptions in the supply chain are causing a crunch in construction materials, in turn prompting a rise in material costs. The shortage of skilled labor is adding to the woes. These supply-chain issues and tightness in the labor market are prolonging the development cycles in a number of markets. Until the global supply chain constraints ease, continued cost inflation and building material shortages are likely to persist.
Improving Real Estate Market Makes Room for Growth: The values of a number of property types, including industrial and apartment, have been improving with the strengthening economy. The pace of deterioration in other asset categories has moderated considerably. The unleashing of pent-up demand and substantial availability of capital for real estate investment will likely expedite the rise in property prices, keep the market buoyant and support development activities. Digital transformation efforts to optimize operations will remain a key focus. Moreover, real estate developers are well poised to capitalize on consumers’ behavioral changes triggered by the pandemic. The e-commerce boom and supply-chain strategy transformations are spurring demand for industrial spaces. Demand for retail real estate spaces in high-traffic corridors is also improving as retailers that are able to beat the pandemic blues are now eyeing expansion. Flight-to-quality might accelerate development activities for offices and real estate.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Real Estate Development industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #237, which places it in the bottom 5% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Since May 2022, the industry’s earnings estimates for the current year have been revised 4.4% downward to $5.40. For 2023, the industry’s earnings estimates have moved 8.5% south to $4.18 over the past year.
Before we present a few stocks that you may want to avoid for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Underperforms Sector and S&P 500
The Zacks Real Estate – Development industry has underperformed the S&P 500 composite and the broader Finance sector in the year so far.
The industry has declined 39.6% during this period compared with the S&P 500 composite’s fall of 15.4% and the broader Finance sector’s decline of 13.1%.
Year-to-Date Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price-to-earnings (P/E), which is a commonly-used multiple for valuing real estate development companies, we see that the industry is currently trading at 3.53X compared with the S&P 500’s 17.52X. The industry is trading below the Finance sector’s forward 12-month P/E of 13.66X. This is shown in the chart below.
Forward 12-Month Price-to-Earnings (P/E) Ratio
Over the past five years, the industry has traded as high as 35.16X and as low as 2.85X, with a median of 15.17X.
2 Real Estate Development Stocks to Avoid
LGI Homes, Inc.: The company engages in the design, construction and sale of homes in the United States. LGI Homes is likely to bear the brunt of rate hikes as many potential buyers are either pausing or reconsidering their purchase decisions. Moreover, continued cost inflation is likely to affect performance.
LGI Homes caries a Zacks Rank #4 (Sell) at present. The Zacks Consensus Estimate for 2022 EPS has been revised 2.7% downward to $18.64 over the past two months. Moreover, the consensus mark for 2022 revenues is pegged at $2.94 billion, suggesting a year-over-year decrease of 3.5%. The company’s shares have declined 17.5% over the past six months.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Forestar Group Inc.: This residential lot development company focuses on investments in land acquisition and development. The major portion of the company’s real estate projects is single-family residential communities. Forestar Group’s performance in the near term is likely to be affected by the current market conditions, development delays and moderation in housing demand.
FOR carries a Zacks Rank of 5 (Strong Sell) at present. The Zacks Consensus Estimate for fiscal 2022 EPS has been revised 17.6% downward to $3.05 over the past two months. The company’s shares have declined 23.7% over the past six months.