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This May Not Be Homebuilding Season, But Builders Are Fair Game Right Now

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Homebuilders are looking to close out a really strong year (or two), as the 2020 boom inflated by the pandemic resulted in record-low inventories and sky-high prices even as land, labor and raw material constraints made inventory building that much more difficult.

This is evident from the Housing and Urban Development (HUD) stats for October. And so we see that while housing units authorized by building permits were 3.4% (±1.6%) above Oct 2020, starts were just 0.4% (±12.3 percent) above the year-ago level and completions were 8.4% (±9.2 percent) below. So although permits are being sought and received, production appears to be falling short. And limited supplies are, of course, pushing up prices.

Prices got so hot in between that some buyers went off market, preparing to wait until sanity returned. The jury is still out on how long that wait is going to be, but different data points indicate that it’s going to be relatively long.

Earlier this month, we learned that the NAHB/Wells Fargo Housing Market Index (for the single-family housing market) for November rose to its highest level in six months, indicating that buyers are willing to pay higher prices and even wait the extra time. The single-family sub-index also expanded 3 points while the gauge for prospective buyers went from 65 to 68.

Meanwhile, the Mortgage Bankers Association (MBA) noted yesterday that the 30-year fixed rate had increased 4 basis points to 3.24% over the past week, with purchase activity continuing to increase for the third straight week. This was partly because of borrowers attempting to lock in mortgages in anticipation of rising rates. Additionally, both conventional and government loan applications increased, with the loan size being “mostly above $400,000,” according to Joel Kan, MBA's AVP of Economic and Industry Forecasting.

Top among the supporting factors is the strong labor market (the unemployment rate dropped to 4.6% in October, the lowest level since Mar 2020), which has benefited from the quick economic rebound off pandemic lows. This led to surging demand for labor, record levels of job openings and resultant wage inflation. With the government also pulling back its support, the summer wave of COVID-19 infections behind us and high spending this holiday season, unemployment rates should decline further with buying power thereby remaining strong.

However, we can’t wish away the logistical challenges and imbalances between the factors of production that are leading to lower output. GDP growth has slowed to 2.1% in the third quarter, entirely attributable to these challenges. Further price increases aren’t desirable, but the Fed appears disinclined to do anything about it just yet.

So here we have an industry that has huge pent-up demand that will generate growth for months to come and the kind of pricing that allows it to pass on rising costs to buyers. It would have been better if the input challenges weren’t there. But in this environment, what’s not to like here?

Beazer Homes, Meritage Homes, Tri Pointe Homes and Toll Brothers are four homebuilding stocks worth buying now-

Beazer Homes USA (BZH - Free Report)

Beazer Homes carries a Zacks Rank #1 (Strong Buy) and an A for value, growth and momentum.

It is expected to grow revenues by 13.6% this year and 9.2% in the next. Its earnings are expected to grow 23.7% and 6.4%, respectively, in the two years.

In the last 30 days, Beazer Homes’ 2021 and 2022 estimates have jumped $1.53 (44.0%) and $1.34 (33.6%), respectively.

Despite all these positives, Beazer Homes trades at a significant discount to both the S&P 500’s 22.0X and all the companies in our universe at a mere 4.1X earnings. Its own median level over the past year is 7.0X.

Meritage Homes (MTH - Free Report)

Meritage Homes also carries a Zacks Rank #1 but its value, growth and momentum scores of B, F and D are not nearly as attractive as Beazer’s. 

Still, analysts expect Meritage Homes to generate some really strong growth. For 2021, the company is expected to grow revenue and earnings by a respective 14.7% and 74.6%. For 2022, these numbers are expected to be a respective 20.0% and 21.2%.

Meritage Homes’ estimate revisions history is also attractive. Its 2021 estimates are up an average 56 cents (3.0%) and 2022 estimates up $1.89 (8.8%) in the last 30 days. They have been rising consistently over the last 90 days.

To top it all, Meritage Homes shares are almost as cheap as Beazer. They trade at a mere 5.1X, below their own median level of 6.5X over the past year and the S&P 500.

Tri Pointe Homes (TPH - Free Report)

#2 (Buy)-ranked Tri Pointe has value, growth and momentum scores of A, C and F.

The weak scores notwithstanding, analyst expectations on the company are robust. For 2021, Tri Pointe is expected to generate revenue and earnings growth of 21.2% and 80.2%, respectively. This will be followed by 7.7% revenue growth and 9.6% earnings growth in 2022.

Tri Pointe’s estimate revisions are also positive. The 2021 estimate is up 29 cents (8.0%) and the 2022 estimate up 34 cents (8.6%) in the last 60 days.

At 6.1X forward 12 months’ earnings, Tri Pointe shares are obviously a bargain.

Toll Brothers (TOL - Free Report)

Toll Brothers shares Tri Pointe’s #2 rank, but its value, growth and momentum scores of A, B and D are more attractive.

Analysts currently expect double-digit growth in Toll Brothers’ revenue and earnings for both 2021 and 2022 (ending October). The 2021 growth rates are 22.4% for revenue and 80.6% for earnings. The 2022 growth rates are 19.1% for revenue and 43.9% for earnings.

Both 2021 and 2022 estimates are up a couple of cents in the last 30 days. But over the last 90 days, Toll Brothers’ 2021 and 2022 estimates are up 6.4% and 6.6%, respectively.

But without an attractive valuation, Toll Brothers shares still wouldn’t be worth buying. Since they are trading at a mere 7.3X earnings (median 9.3X), there’s no reason to complain.

6-Month Price Movement

Zacks Investment ResearchImage Source: Zacks Investment Research