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4 Housing Stocks to Buy on Soaring New Home Sales

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New home sales hit a more than eight-year high in April, crushing market expectations. Moreover, home prices surged to record levels, suggesting strong demand in the all-important spring selling season.

Data released by the U.S. Census Bureau and the Department of Housing and Urban Development on May 24 showed that sales of new single-family homes rose 16.6% to a seasonally adjusted annual rate of 6,19,000 units in April from an upwardly revised March  rate of 5,31,000. The number also represents a 23.8% increase year over year.

Moreover, the median sales price jumped 9.7% year over year to $321,100 in the month – the highest since 2014. The average sales price climbed 6% to $379,800 – the highest rate so far this year.

However, inventory levels have been tightening. New home inventory for sale was 243,000 units at the end of April, down 0.4% from end March. This is a 4.7-month supply at the current sales pace, down from the March level.

Shares of major homebuilders rose on robust data. Toll Brothers, Inc. (TOL - Free Report) gained 8.7%, PulteGroup, Inc. (PHM - Free Report) was up 5.1%, D.R. Horton, Inc. (DHI - Free Report) went up by 4.2%, KB Home (KBH - Free Report) appreciated 7.5% and Lennar Corporation (LEN - Free Report) rose 3.9%.

A flurry of other housing data released so far this month has also been fairly upbeat. U.S. housing starts rose 6.6% from a revised March number to an annual rate of 1,172,000 in April, surpassing market expectations. The number of building permits — a gauge of future construction — rose 3.6% in April, according to data released on May 17.

Further, the National Association of Home Builders (NAHB) reported that the home builder sentiment index (HMI) remained flat at 58 in May for the fourth consecutive month. Moreover, existing home sales rose for the second straight month in April, per data released by the National Association of Realtors on May 20.

And to top it all, the Q1 performance across the broader construction sector was more or less better than expected. Leading homebuilders, Lennar and KB Home – the early birds – set the tempo for the season with positive sales and earnings surprises. Other industry bigwigs like Pulte and D.R. Horton also beat the Zacks Consensus Estimate for both earnings and sales on the back of higher home sales. Toll Brothers, which reported its second-quarter fiscal 2016 results on Tuesday, also beat the Zacks Consensus Estimate for both earnings and sales.

Almost all homebuilders agree that the spring selling season was off to a good start with strong demand and traffic trends. The companies are also optimistic that the growth momentum will be sustained through the rest of the year.

Despite a weak start this year amid equity market volatility and global concerns, the construction sector seems to have recovered on the back of strong housing fundamentals. Positives like an improving economy, rising wages, favorable job outlook and a tight supply situation raise optimism about the sector’s performance for the rest of 2016.

This increase in home construction not only benefits homebuilders but also spurs demand for homebuilding materials, home decoration products and other related businesses. This, in turn, boosts the growth prospects of companies manufacturing these products like Vulcan Materials Co. (VMC - Free Report) , Martin Marietta Materials, Inc. (MLM - Free Report) , Masco Corp. (MAS - Free Report) Headwaters Inc.  and many others. They too performed generally well in Q1.

3 Construction Stocks for Your Portfolio

With the housing sector going from strength to strength, it makes sense to pick stocks from this space. However, choosing winning stocks is important.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.

Installed Building Products, Inc. IBP operates as a residential insulation installer in the U.S.

Installed Building Products has a Zacks Rank #1 (Strong Buy) and a VGM Score of B. The company has expected earnings growth of 78.9% for the current year. Its earnings estimate for the current year has risen 9.6% over the last 30 days.

Tutor Perini Corp. (TPC - Free Report) provides diversified general contracting, construction management and design-build services to private clients and public agencies worldwide.

Tutor Perini has a Zacks Rank #1 and a VGM Score of B. The company has expected earnings growth of 76.2% for the current year. Its earnings estimate for the current year has improved 8.8% over the last 30 days.

Comfort Systems USA, Inc. (FIX - Free Report) provides comprehensive heating, ventilation and air conditioning installation, maintenance, repair and replacement services.

The company has a Zacks Rank #1 and a VGM Score of A. It has expected earnings growth of 29.5% for the current year. Its earnings estimate for the current year has increased 7.7% over the last 30 days.

Dycom Industries, Inc. (DY - Free Report) provides diverse services such as engineering, construction, maintenance and installation for cable and telephone companies.

Dycom has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of 61.29% for the current year. Its earnings estimate for the current year has improved 0.3% over the last 30 days.

Conclusion

Land and labor shortage is a valid concern for homebuilders and so are tedious underwriting standards. And you can’t wish away competition that can at times get fierce and ignore cost inflation. Nonetheless, homebuilders in general are on a high at the moment given the rising demand trends.

So don’t miss out on our three stock choices that are superbly poised for growth.

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