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3 Buy-Ranked Stocks to Beat the Dip in Housing Starts

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Yesterday, the U.S. Census Bureau and the U.S. Department of Housing and Urban Development jointly announced housing starts data for the month of July.

According to the report, there was a 4.1% decline in building permits for privately-owned housing units from the revised June rate of 1,275,000 but a 4.1% increase from the year-ago period. Meanwhile, single-family authorizations remained unchanged from June at 811,000.  

Privately-owned housing starts declined 4.8% sequentially in July to a seasonally adjusted annual rate of 1,155,000. The numbers represent a 5.6% decline from the year-ago period as well. Single-family housing starts also declined (down 0.5% from the revised June figure of 860,000).

The biggest issue being faced by the housing market is low supply. Inventory build-up is being impacted by factors like rising lumber costs as well as tight labor supply and shortage of land. The huge forest fires in Eastern Canada could drive lumber prices even higher, creating a potential headwind for the industry.

However, pent-up demand, job gains, income growth, relatively low mortgage interest rates and low inventory of new and existing homes are some of the factors that should support sustained growth in housing demand.

Picking the Right Stocks

The Home Builders segment enjoys a good Zacks Industry Rank (Top 13% out of 256 industries). The industry has outperformed the broader market (S&P 500) year-to-date (YTD) as well.

Here is a look at three housing stocks with a Zacks Rank #1 (Strong Buy) or #2 (Buy).

KB Home (KBH - Free Report) : Los Angeles, CA-based KB Home is one of the largest and most recognized homebuilding companies in the U.S. The company sells and builds new homes primarily to first-time, move-up and active adult homebuyers with the focus being on first-time buyers, which represents the largest demand segment. Key markets include California on the West Coast, Arizona and Nevada in the Southwest, Colorado and Texas in the Central region and Florida and North Carolina in the Southeast.

The company has a strong earnings track record with results surpassing expectations in each of the last four quarters with an average surprise of 12.47%. A solid backlog and a favorable market environment bode well for KB Home. Higher deliveries combined with an increasing average selling price should drive revenue growth. Meanwhile, increasing activity in the more affordable submarkets of the cities served by KB Home, especially from first-time and first move-up buyers, provides significant opportunity for the company. Estimated earnings growth for the current year is 51.7%. Shares of KB Home have gained 49.2% year to date, significantly outperforming the industry’s 31.7% rally.

KBH, a Zacks Rank #1 stock, also has a VGM Score of B. The VGM Score is a useful tool that allows investors to gain an insight into a stock’s strengths and weaknesses. Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 or #2 offer the best upside potential. You can see the complete list of today’s Zacks #1 Rank stocks here.

NVR, Inc. (NVR - Free Report) : Reston, VA-based NVR is one of the nation's largest homebuilding and mortgage banking companies. The company sells and constructs homes under three brand names: Ryan Homes (offers a variety of home-buying options to suit a wide range of consumer needs including single-family, townhouse, or garden condominium), NVHomes (offers additional architectural details and designer elements) and Heartland Homes (luxury homes). NVR’s homebuilding business covers twenty-nine metropolitan areas in fourteen states and Washington, D.C.

NVR, a Zacks Rank #1 stock has a pretty good earnings track record with the company surpassing expectations in three of the last four quarters with an average surprise of 14.19%. The stock has seen the Zacks Consensus Estimate for current-year earnings being revised 7.3% upward over the last 30 days. Estimated earnings growth for the current year is 33.9%. NVR stock has shot up 65.4% year to date, significantly outperforming the industry it belongs to.  

Toll Brothers, Inc. (TOL - Free Report) : Horsham, PA-based Toll Brothers is focused on the luxury homes market. The company builds and sells detached and attached homes in luxury residential communities located in affluent suburban markets that cater to move-up, empty-nester, active-adult, age-qualified, and second-home buyers. The company also has a presence in the urban infill markets. Toll Brothers, a Zacks Rank #2 stock, has a VGM Score of B. Estimated earnings growth for the current year is 43.3%.

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