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One of the great paradoxes of Wall Street is that the most lucrative investments often defy conventional wisdom, appearing counterintuitive and contrarian at first glance. While many investors flock to popular trends, the best opportunities frequently emerge from unexpected places. Contrarian investors seek out undervalued assets or overlooked sectors that are not on the radar of the average investor due to skepticism or unsubstantiated fear. When proven right, contrarian, unconventional investments can lead to substantial profits because the market eventually catches on and recognizes their true value. However, savvy investors understand that it’s not enough to simply buy an investment because it is contrarian in nature. For example, biotech stocks have been hated for years and have been falling in tandem with bearish sentiment.
Image Source: TradingView
Instead, a contrarian investment must have substance. That is, it should have the attributes that most winning investments have, including robust earning growth, reasonable valuations, strong technicals, and institutional sponsorship.
Opportunities in the Homebuilders?
It’s easy to understand why investors may discount the potential for homebuilders. For example, in 2021, the average mortgage rate was a bargain basement 2.96%, and today, the average 30-year fixed rate has ballooned 8.628%. However, dig deeper, and there are several reasons to be bullish homebuilders, including:
Earnings Growth is Robust
Even with sky-high rates, an underbuilt US housing market puts a floor under demand. Furthermore, post-COVID relocation trends are adding more demand to the housing market. Toll Brothers ((TOL - Free Report) ), a bellwether housing stock, grew earnings a healthy 59% last quarter year-over-year. For full-year 2023, Zacks Consensus Estimates predict annual EPS growth of around 20%.
Image Source: Zacks Investment Research
Valuations are Reasonable
DR Horton ((DHI - Free Report) ), the largest homebuilder in the US, has a P/E ratio of just 7.26x. DHI’s valuation is near decade lows and is a fraction of the S&P 500 Index’s 24.59x p/e.
Image Source: Zacks Investment Research
Technical Picture is Intact
Several homebuilders like PulteGroup ((PHM - Free Report) ) are retreating to their 200-day moving averagefor the first time since breaking out. Uniform pullbacks of this nature to the 200-day moving average after a strong uptrend provide investors with attractive risk-to-reward opportunities.
Image Source: Zacks Investment Research
Sentiment is Poor
Recent Google Trends data suggests that interest in homebuilding stocks wanes rates rise. As I described earlier, big trends emerge when the investing public fails to pay attention.
Smart money is Accumulating Homebuilders
Berkshire Hathaway’s (BRKA) latest SEC investing disclosure revealed that legendary value investor Warren Buffett began accumulating shares in three major homebuilders, including DR Horton, Lennar ((LEN - Free Report) ), and NVR ((NVR - Free Report) ). Buffet’s long investing timeframe, investing savvy, and deep pockets should help quell perspective investor fears.
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Homebuilders: A Bullish Contrarian Opportunity?
Unconventional Investments Can Breed Opportunity
One of the great paradoxes of Wall Street is that the most lucrative investments often defy conventional wisdom, appearing counterintuitive and contrarian at first glance. While many investors flock to popular trends, the best opportunities frequently emerge from unexpected places. Contrarian investors seek out undervalued assets or overlooked sectors that are not on the radar of the average investor due to skepticism or unsubstantiated fear. When proven right, contrarian, unconventional investments can lead to substantial profits because the market eventually catches on and recognizes their true value. However, savvy investors understand that it’s not enough to simply buy an investment because it is contrarian in nature. For example, biotech stocks have been hated for years and have been falling in tandem with bearish sentiment.
Image Source: TradingView
Instead, a contrarian investment must have substance. That is, it should have the attributes that most winning investments have, including robust earning growth, reasonable valuations, strong technicals, and institutional sponsorship.
Opportunities in the Homebuilders?
It’s easy to understand why investors may discount the potential for homebuilders. For example, in 2021, the average mortgage rate was a bargain basement 2.96%, and today, the average 30-year fixed rate has ballooned 8.628%. However, dig deeper, and there are several reasons to be bullish homebuilders, including:
Earnings Growth is Robust
Even with sky-high rates, an underbuilt US housing market puts a floor under demand. Furthermore, post-COVID relocation trends are adding more demand to the housing market. Toll Brothers ((TOL - Free Report) ), a bellwether housing stock, grew earnings a healthy 59% last quarter year-over-year. For full-year 2023, Zacks Consensus Estimates predict annual EPS growth of around 20%.
Image Source: Zacks Investment Research
Valuations are Reasonable
DR Horton ((DHI - Free Report) ), the largest homebuilder in the US, has a P/E ratio of just 7.26x. DHI’s valuation is near decade lows and is a fraction of the S&P 500 Index’s 24.59x p/e.
Image Source: Zacks Investment Research
Technical Picture is Intact
Several homebuilders like PulteGroup ((PHM - Free Report) ) are retreating to their 200-day moving averagefor the first time since breaking out. Uniform pullbacks of this nature to the 200-day moving average after a strong uptrend provide investors with attractive risk-to-reward opportunities.
Image Source: Zacks Investment Research
Sentiment is Poor
Recent Google Trends data suggests that interest in homebuilding stocks wanes rates rise. As I described earlier, big trends emerge when the investing public fails to pay attention.
Smart money is Accumulating Homebuilders
Berkshire Hathaway’s (BRKA) latest SEC investing disclosure revealed that legendary value investor Warren Buffett began accumulating shares in three major homebuilders, including DR Horton, Lennar ((LEN - Free Report) ), and NVR ((NVR - Free Report) ). Buffet’s long investing timeframe, investing savvy, and deep pockets should help quell perspective investor fears.