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5 Stocks to Buy as August Housing Starts Hit 3-Month High

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Housing starts saw a sharp pick-up and touched a three-month high in August as builders ramped up construction of multifamily homes. This might turn things around for housing market, which has been on rocky grounds due to rising costs and mortgage rates despite a solid job market and slashed taxes.

Per the Census Bureau and Housing and Urban Development Department, housing starts increased 9.2% to 1.282 million units (seasonally adjusted annual rate) in August from the prior month. Notably, the metric outpaced the seasonally adjusted consensus of 1.232 million and improved 9.4% on a year-over-year basis.

However, building permits — an indicator of future housing activity prospects — declined 5.7% to 1.229 million. The metric was also lower than the projected level of 1.316 million, mirroring a 5.5% year-over-year decrease.

Multifamily Starts – A Bright Spot

The sharp increase in housing starts can be attributed to a 29.3% gain in multifamily starts. Meanwhile, single-family housing starts, which hold a major share of the housing market, inched up 1.9% in August. While housing starts rose across major geographical regions like the Midwest, South and West, it remained flat in Northeast. Multifamily starts, which witnessed a solid improvement in 2017, remain impressive in 2018.

 

 

NAHB Index Remains Strong

The National Association of Home Builders/Wells Fargo Housing Market Index (“HMI”) remained flat in September but was above the analysts’ expectation. However, the September 2018 reading was up three points to 67 compared with the year-ago number. Notably, any reading more than 50 signals improving conditions.

Two of the three HMI components grew in September. Current sales conditions increased one point to 74. Buyer traffic held steady at 49 and sales prediction over the next six months rose two points to 74. Importantly, the HMI gauge of future sales expectations remained in the 70s, signaling that housing demand will continue to grow this year.

Will Homebuilding Industry Rebound?

So far this year, Homebuilding industry has witnessed a sharp decline of 22.2% against the broader S&P 500 Composite market's 9.9% growth. Inventory shortage, higher mortgage rates, higher costs for construction companies and slower growth in housing led to the downside. Further, tariffs on aluminium and steel, and limited land availability are denting margins.

Although decline in building permits raises concern, sharp gain in housing starts and strong NAHB Index is encouraging.

5 Solid Picks

It might be difficult for one to look at each parameter and compare with the peer group for an analysis on whether the stock is attractive from the value perspective. To make the task easy, Zacks has designed the new Style Score System.

The attractiveness of a stock as an investment option is confirmed by its Value Style Score of A or B. The Value Style Score condenses all valuation metrics into one actionable score that helps investors steer clear of ‘value traps’ and identify stocks that are truly trading at a discount. Our research shows that stocks with Style Scores of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best upside potential. You can see the complete list of today’s Zacks #1 Rank stocks here.

We have narrowed down our search to the following stocks based on a solid Zacks Rank #1 or 2 and Value Style Score of A or B.

PulteGroup, Inc. (PHM - Free Report) engages in the homebuilding and financial services businesses, primarily in the United States. It has emerged as a strong contender with a long-term expected earnings growth rate of 19.4%. Also, the stock has a Zacks Rank #1 and a VGM Score of A. For 2018 and 2019, PulteGroup anticipates earnings growth of 61.2% and 10.4%, respectively. Further, the company’s earnings have surpassed the Zacks Consensus Estimate in the preceding four quarters, the average beat being 14.3%.

PGT Innovations, Inc. (PGTI - Free Report) , which manufactures and supplies residential impact-resistant windows and doors, sports a Zacks Rank of 1. The company has a long-term expected earnings grow rate of 19.3% and a favorable VGM Score of A. For 2018 and 2019, it expects earnings growth of 81.9% and 21.8%, respectively.  In addition, PGT Innovations’ earnings have surpassed the Zacks Consensus Estimate in three of the trailing four quarters, the average positive surprise being 17.9%.

Continental Building Products, Inc. (CBPX - Free Report) , which manufactures gypsum wallboard, joint compound and complementary finishing products, carries a Zacks Rank #1. The company has a VGM Score of A and an impressive long-term earnings growth rate of 30%. Also, it has a solid expected earnings growth of 52.6% for the current year and 16.3% for the next year.

United Rentals, Inc. (URI - Free Report) manufactures metal products for the building industry. Currently, it has a Zacks Rank #2 and VGM Score of B. The company’s earnings have surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average beat being 29.8%. Furthermore, United Rentals has an impressive current and next-year earnings growth rate of 81.3% and 27.1%, respectively.

EMCOR Group, Inc. (EME - Free Report) , a provider of mechanical and electrical construction as well as industrial and energy infrastructure services for a diverse range of businesses, carries a Zacks Rank of 2. Additionally, it has an impressive VGM Score of B. EMCOR Group earnings have surpassed the consensus mark in the trailing four quarters, with an average beat of 24.5%. Further, earnings in the current and next year are estimated to grow 15% and 7.3%, respectively.

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