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Housing Upbeat on May's 6-Month High New Home Sales: 5 Picks

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Myriad problems have been plaguing the homebuilding industry of late, however the new home sales data for the month of May brings some relief.

New Home Sales Hit Six-Month High

According to the report released by the Census Bureau and Department of Housing and Urban Development, sales of newly constructed single-family homes increased 6.7% month-over-month in May and 14.1% year over year.

The upside was led by a 17.9% increase in new home sales in the South, while sales in Northeast and West dropped 10% and 8.7%, respectively. Sales, however, remained almost unchanged in the Midwest.

Also, housing starts made a comeback in May with a 5% increase, reaching the highest level since 2007. The figure also improved 20.3% on a year-over-year basis. Single-family and multi-family starts surged in May.

Single-family homes starts, which are of high importance, rose 3.9% from the prior month and improved 18.3% year over year. Multi-family starts increased 11.3% from the prior month and rose 27.4% from the prior year. Specifically, a 62.2% rise in new residential construction activity in Midwest boosted overall housing starts. However, construction slumped in the Northeast, South and West regions.

Housing Industry: Boons & Curses

A rise in interest rate this month dampened investors’ optimism in the housing space. The interest rate hike has come at a time when home prices are on the rise, thanks to supply constraints and increased raw materials costs.

Builders are disturbed by the rise in aluminum and steel costs, thanks to the newly-imposed tariffs. This along with higher lumber prices due to the imposition of import tariff is denting builders’ margins, compelling them to raise prices. Further, troubles like labor shortage, limited land availability and apprehension of two more hikes in 2018 along with three in 2019 continue to make things tricky.

Evidently, homebuilder sentiment slid in June from the previous month to the lowest level this year and below its six-month average of 70. According to Associated Builders and Contractors, construction material prices increased 2.2% in May from the prior month, representing the largest monthly increase since May 2008. On a year-over-year basis, the price of construction materials rose 8.8%.

Despite the dreary countless scenario for the homebuilding industry, consumer demand is robust considering solid economic growth, as is evident from low unemployment and solid wage growth. The trend is likely to continue in the near future with the Federal Reserve expecting economic growth of 2.8% for 2018, highlighting an increase of 0.1 percentage point from the estimates issued in March 2018. The Fed also expects unemployment rate of 3.6% in 2018, down from the previous projection of 3.8%.

Given the positive outlook, investing in stocks from the homebuilding industry seems prudent. Investors willing to ignore short-term anomalies would do well by considering these stocks as they add stability to a portfolio.

Picking the Right Stocks

As the solid momentum is expected to continue in the rest of 2018, investors can bet on stocks from the broader construction sector. Apart from homebuilding, we bring stocks from other building product industries as well. Increased home construction activity will invariably lead to higher demand for building products.

We have narrowed down our search to the following stocks based on a Zacks Rank #1 (Strong Buy) or 2 (Buy) along with other relevant metrics.

M.D.C. Holdings (MDC - Free Report) flaunts a Zacks Rank #1 and a Value Score of A and a Momentum Score B. The Zacks Consensus Estimate for current-year earnings has been revised up 15.1% upward for 2018 and 11% for 2019 over the last 60 days. The Zacks Consensus Estimate for EPS growth is projected at 33.3% for the current year. You can see the complete list of today’s Zacks #1 Rank stocks here.

M.D.C. Holdings, Inc. Price and Consensus

 

NCI Building Systems (NCS - Free Report) holds a Zacks Rank #2. The company has been witnessing upward estimate revisions — 5.4% for fiscal 2018 and 1.2% for fiscal 2019 — in the last 60 days. The Zacks Consensus Estimate for EPS growth is pegged at 71.2% for fiscal 2018 and 26.5% for fiscal 2019. The company has a Value and Growth Score of A, suggesting that the stock has ample room to run.

NCI Building Systems, Inc. Price and Consensus

 

Meritage Homes Corporation (MTH - Free Report) has a Zacks Rank #2 stock and a Value Score of B. Earnings estimates for 2018 and 2019 have moved up 5.3% and 1.2%, respectively, over the past 60 days. The Zacks Consensus Estimate projects EPS growth of 42.5% for the current year.

Meritage Corporation Price and Consensus

 

Armstrong World Industries, Inc. (AWI - Free Report) holds a Zacks Rank #2 and a Value and Growth Score of B. The company has been witnessing upward estimate revisions — 6% for 2018 and 1.9% for 2019 — in the last 60 days. The Zacks Consensus Estimate for EPS growth is pegged at 22.8% for 2018 and 15.4% for 2019.

Armstrong World Industries, Inc. Price and Consensus

 

Beazer Homes USA, Inc. (BZH - Free Report) holds a Zacks Rank #2. The company has been witnessing upward estimate revisions — 3.1% for fiscal 2018 and 5.6% for fiscal 2019 — in the last 60 days. The Zacks Consensus Estimate for EPS growth is pegged at 6.5% for fiscal 2018 and 37.2% for fiscal 2019. The company has a Value and Growth Score of A.

Beazer Homes USA, Inc. Price and Consensus

 

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