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5 Top Stocks From the Flourishing Homebuilding Industry

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The rising need for more work-at-home space and record-low borrowing costs have been aiding the Zacks Building Products - Home Builders industry. Indeed, the U.S. housing space continues to grapple with labor shortage and a dearth of buildable lots. Also, disruption in the supply chain arising from the novel coronavirus outbreak may impact builders’ ability to deliver on time. That said, low mortgage rates and the Fed’s dovish stance should continue to spur home buying activity in the near term, thereby aiding companies like Century Communities, Inc. (CCS - Free Report) , PulteGroup Inc. (PHM - Free Report) , Dream Finders Homes, Inc. (DFH - Free Report) , Lennar Corporation (LEN - Free Report) , and TRI Pointe Group, Inc. (TPH - Free Report) .

Industry Description

The Zacks Building Products - Home Builders industry comprises manufacturers of residential and commercial buildings. Some of the industry players are involved in providing financial services that include selling mortgages and collecting fees for title insurance agency as well as closing services.

3 Trends Shaping the Future of the Homebuilding Industry

Fed’s Dovish Stance & Low Borrowing Costs: The U.S. housing market remains buoyant, with home sales rising at a record pace, defying low inventory levels and broad-based economic as well as public health risks. The fundamentals of this rate-sensitive market — which accounts for almost 3% of the economy — remain favorable, given the Fed’s dovish monetary stance and lower mortgage rates. Additionally, the need to rebuild inventories is expected to drive the U.S. housing aggressively.

Suburban Shift, Cost-Control Efforts, Focus on Entry-Level Buyers: In addition to low borrowing costs, the changing geography of housing demand has been supporting builder confidence. Demand for new homes is improving in lower-density markets, including small metro areas, rural markets and large metro exurbs, as people seek larger homes to work from home during the pandemic. The desire for more space and amenities to accommodate working and learning from home should continue to boost the U.S. housing market in the near term.

Furthermore, homebuilders have been controlling construction costs by designing homes efficiently, and obtaining construction materials and labor at competitive prices. Some homebuilders also follow a dynamic pricing model, which enables it to set the price according to the latest market conditions. Again, majority of the companies are focused on growing demand for entry-level homes and addressing the need for lower-priced homes, given affordability concerns prevailing in the U.S. housing market. Meanwhile, industry biggies have been acquiring other homebuilding companies in desirable markets, in turn resulting in improved volumes, revenues and profitability.

Supply Chain Hurdles, Higher Input Costs & Tight Labor Market: The COVID-19 outbreak and response to the health crisis in various countries are likely to have a lingering impact on the supply chain in the near term, which may impact builders’ ability to deliver on time. Precisely, rising material costs are quite challenging. According to an Associated Builders and Contractors' latest analysis of information provided by the U.S. Bureau of Labor Statistics, there has been some upward pressure on certain input prices in recent weeks, including energy prices. Precisely, softwood lumber prices were 83.4% higher for March 2021 from a year ago.

Again, shortage of skilled labor continues to be a pressing concern. Homebuilders remain cautiously optimistic about the industry’s prospects owing to rising land and labor costs.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Building Products - Home Builders industry is a 19-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #35, which places it at the top 14% 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 upbeat 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 top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since February 2021, the industry’s earnings estimates for 2021 and 2022 have gone up approximately 11.7% and 2.8%, respectively.

Given solid near-term prospects, we will present a few stocks that have the potential to outperform the market. But before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.

Industry Outperforms Sector and S&P 500

The Zacks Building Products - Home Builders industry has outperformed the S&P 500 Index and broader Zacks Construction sector in the past year.

Over this period, the industry has gained 91.1% compared with the S&P 500’s rise of 50.1% and broader sector’s 88.7% increase.

One-Year Price Performance

 

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing homebuilding stocks, the industry is currently trading at 9.4X compared with the S&P 500’s 22.5X and the sector’s 17.1X.

Over the last five years, the industry has traded as high as 14.4X and as low as 6.3X, with a median of 10.4X, as the chart below shows.

Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500

 

5 Homebuilding Stocks to Buy Right Now

We have selected five stocks from the Zacks homebuilding space that currently sport a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Century Communities, Inc.: This Greenwood Village, CO-based company engages in the design, development, construction, marketing, and sale of single-family attached and detached homes. Demand for its affordable new homes driven by favorable demographics, tight resale supply and low interest rates, while underscoring the strength of its competitive positioning and national footprint across 28 high-growth markets, has been driving growth of Century Communities.

The stock has gained 248.6% over the past year, outperforming the industry’s 91.1% rise. The company currently sports a Zacks Rank #1 and has an expected earnings growth of 53.2% for 2021. The Zacks Consensus Estimate for its 2021 earnings has moved up 14.5% over the past seven days.
Price and Consensus: CCS


PulteGroup: This company offers a wide variety of home designs including single family detached, townhouses, condominiums and duplexes at different prices, with a variety of options and amenities for all major customer segments: first-time, move-up and active adult. PulteGroup’s brand portfolio includes Pulte move-up brand, Centex first-time brand, Del Webb active adult, DiVosta Homes, and John Wieland Homes and Neighborhoods. Solid housing market momentum, prudent land investment strategy, focus on entry-level buyers and protecting liquidity as well as efficient management of cash flows have been benefiting PulteGroup.

The stock has gained 116.8% over the past year. The company currently sports a Zacks Rank #1 and has an expected earnings growth of 47.1% for 2021. The Zacks Consensus Estimate for its 2021 earnings has moved up 25.1% over the past seven days.

Price and Consensus: PHM


Dream Finders Homes, Inc.: Based in Jacksonville, FL, this company builds homes in Florida, Texas, North Carolina, South Carolina, Georgia, Colorado, Virginia and Maryland. It began trading on the NASDAQ Global Select Market under the symbol “DFH” on Jan 21, 2021. The company’s continuous focus on margin accretion and building its portfolio of controlled lots, while maintaining the asset-light homebuilding business model, will drive growth.

The stock, which currently carries a Zacks Rank #2, has gained 20.6% since its inception of trading. The Zacks Consensus Estimate for its 2021 earnings has gone up 5.7% over the past 60 days. Earnings for the current year is currently pegged at $1.29 per share. Revenues of $1.89 billion for 2021 are expected to witness a 153.5% improvement.
Price and Consensus: DFH



Lennar: Based in Miami, FL, Lennar is engaged in homebuilding and financial services in the United States. The company’s dynamic pricing model, asset light strategy, effective cost control and higher operating leverage have been aiding its performance. Although rising land and labor costs remain headwinds, its focus on the lighter land strategy to boost free cash flow will bolster the balance sheet and thereby drive returns.

The stock has gained 109.6% over the past year. The company currently carries a Zacks Rank #2 and has an expected earnings growth of 39.9% for fiscal 2021. The Zacks Consensus Estimate for its fiscal 2021 earnings has moved up 4.8% over the past 30 days.

Price and Consensus: LEN


TRI Pointe Group, Inc.: Based in Irvine, CA, this company engages in the design, construction, and sale of single-family detached and attached homes in the United States. It has been gaining from robust demand, pricing and better operating leverage. Cost-cutting initiatives implemented earlier this year and focus on entry-level buyers have been adding to the positives. Furthermore, the company witnessed backlog (in units) growth of 56% year over year for first-quarter 2021. The upside in orders was broad based across a number of demographic segments and geographies, with the majority of buyers representing the millennial cohort.

The stock, carrying a Zacks Rank #2 at present, has gained 116.4% over the past year. The Zacks Consensus Estimate for its 2021 earnings has been upwardly revised by 18.9% over the past 30 days. Earnings for 2021 are expected to grow 44.7%.
Price and Consensus: TPH

 

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