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Housing Indomitable Despite Slow Home Sales: 4 Picks

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New home sales dropped in May from a more than eight-year high in April. Data released by the U.S. Census Bureau and the Department of Housing and Urban Development on Jun 23 showed that sales of new single-family homes declined 6% to a seasonally adjusted annual rate of 5,51,000 units in May from a downwardly revised April rate of 5,86,000. The number, however, represents an 8.7% increase year over year.

Numbers Speak of Strength

Interestingly, the two other housing related data – higher home prices and tight inventories – reversed in this release.

The median sales price rose 1% year over year to $290,400 in the month. The average sales price climbed 5.3% to $358,900. However, both the metrics were down from April.

New home inventory for sale was 244,000 units at the end of May, up 1.2% from end April. This is a 5.3 month supply at the current sales pace, up from the preceding month.

Though new home sales slowed down slightly, the rest of the housing data has been fairly upbeat, clearly indicating that the overall housing market remains intact. The number of building permits — a gauge of future construction — rose 0.7% in May, according to data released on Jun 17.

Further, the National Association of Home Builders (NAHB) reported that the home builder sentiment index (HMI) rose 2 points to 60 in June, after holding steady for the past four months. Moreover, existing home sales rose 1.8% in May – its highest pace in almost a decade, per data released by the National Association of Realtors on Jun 20. Construction spending touched a five-year high in April, per data released earlier this month. However, U.S. housing starts fell 0.3% from a revised April number to an annual rate of 1,164,000 in May due to a decline in multi-family production.

The strong housing data shows that the homebuilding market remains a pillar of strength for the economy, amid a volatile U.S. stock market, uncertainty surrounding the Fed rate hike, a Brexit referendum and volatile gasoline prices.

Construction Sector Price Index

Construction Sector Price Index

Homebuilders Flourish

All major homebuilders were trading in the positive despite the slow home sales data. Toll Brothers, Inc. (TOL - Free Report) , PulteGroup, Inc. (PHM - Free Report) , D.R. Horton, Inc. (DHI - Free Report) , KB Home (KBH - Free Report) and Lennar Corporation (LEN - Free Report) all gained more than 1% on Thursday.

This week, Lennar and KB Home reported better-than-expected second quarter results, beating the respective Zacks Consensus Estimates for both earnings and sales.

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. The spring selling season in 2016 was better than last year. The springtime weather boosts construction activity and traffic trends.

Positives like an improving economy, modest wage growth, low unemployment levels, low interest rates, positive consumer confidence and a tight supply situation raise optimism about the sector’s performance for the second half 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, bolsters the growth prospects of companies manufacturing these products like Vulcan Materials Company (VMC - Free Report) , Martin Marietta Materials, Inc. (MLM - Free Report) , Masco Corporation (MAS - Free Report) , and Headwaters Incorporated and many others.

4 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. 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 60 days.

Tutor Perini Corporation (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 60 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 #2 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 60 days.

NCI Building Systems Inc. is one of the major integrated manufacturers of metal products for the North American non-residential construction industry.

NCI Building Systems has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of 61.90% for the current year. Its earnings estimate for the current year has improved 6.3% over the last 60 days.

Conclusion

Land and labor shortage is a valid concern for homebuilders and so are tedious underwriting standards. There are also pockets of weakness in some markets like Houston. 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 four stock choices that are superbly poised for growth.

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