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Home Building Stocks Are Attractive Now

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You’d think that people would be concerned about the virus and avoid meeting strangers to buy and sell homes. Turns out that isn’t the case at all. Because not only did the lockdown create pent-up demand, it also increased awareness about what one needs in a home that must increasingly double as an office, school, playground, gym and whatnot plus the benefits of more walls and doors for safety, privacy and “me time.”

Sellers are still reticent to be honest (new listings were down 1.2% year on year in the week ending Jun 20). Still, it’s a big comeback considering they were down 27.1% in the first week of April [on Zillow (ZG - Free Report) ].

Good things are happening for sellers in general because homes are selling within 22 days of listing, which is the fastest pace since early June 2018. With fewer listings and higher sales, the limited inventory (down 18.8% from last year) is pushing up prices (up 3.2% from last year). This, in turn, is working as a big incentive to bring sellers back.

But those numbers deal with existing homes. The picture is even rosier as far as new construction is concerned, with customer searches on Zillow jumping 73% from last year and unsurprisingly, the top reason for most people was the desire to design their new home.

New construction should come back strongly in response to this demand and is already indicated in the Architecture Billings Index (ABI) from The American Institute of Architects (AIA) released on Jun 26 (for May). A sector-wise split of the index shows institutional at 35.7 (it was 36.1 in April), multi-family residential 34.8 (30.3 in April), mixed practice 28.5 (29.0 in April) and commercial/industrial 24.8 (27.8 in April). The project enquiries index went from 28.4 to 38.0. The overall index was 32.0 in May compared to 29.5 in April.

While there will be greater clarity once the June numbers are available, it’s clear that residential construction is likely to come back stronger than the other segments. Institutional/government is more attractive than residential at the moment but all segments remain in contraction for now (a number over 50 indicates expansion).

The industry is in the top 26% of 250+ Zacks-classified industries. Stocks in the top 50% typically beat the bottom 50% by a factor of more than 2 to 1.

5 Zacks Rank #1 Stocks To Take Advantage Of This Boom

Meritage Homes Corp. (MTH - Free Report)

Based in Scottsdale, AZ, Meritage Homes Corporation is one of the leading designers and builders of single-family homes. The company primarily engages in building and selling single-family homes for entry-level, first-time, move-up, luxury and active adult buyers in historically high-growth regions of the United States.

In the last 90 days, the Zacks Consensus Estimate for 2020 dropped from $5.95 to $5.47 then went back up to $5.83. The 2021 estimate followed a similar path, dropping from $6.60 to $5.59 before going back up to $6.03. With a lot more time to go and the trends looking much more positive, there’s a good chance of a reversal.

It topped estimates in each of the last four quarters by an average margin of 32.6%.

The shares are trading above their median P/E value over the past year although they are off their annual high suggesting further room for expansion. The S&P 500 is trading at its annual high.

D.R. Horton, Inc. (DHI - Free Report)

Texas-based D.R. Horton is one of the leading national home builders, primarily engaged in the construction and sale of single-family houses both in the entry-level and move-up markets. Homes vary in sizes from 1,000 to 4,000 square feet, with prices ranging from $100,000 to more than $1,000,000. D.R. Horton’s operations are spread over 90 markets across 29 states in the East, Midwest, Southeast, South Central, Southwest and West regions of the United States. Its houses are sold under the brand names D.R. Horton - America’s Builder, Emerald Homes, Express Homes and Freedom Homes.

In the last 90 days, The Zacks Consensus Estimate for 2020 (ending September) dropped from $4.95 to $4.58 but has since started trending up. It is currently at $4.61. For 2021, the estimate dropped from $5.33 to $4.30 and has since recovered to $4.42.

It topped estimates in each of the last four quarters by an average margin of 12.6%.

The shares are trading above their median P/E value over the past year although they are off their annual high suggesting further room for expansion.

NVR, Inc. (NVR - Free Report)

NVR constructs and sells single-family detached homes, townhomes and condominium buildings, all of which are primarily constructed on a pre-sold basis. Homes are sold under the Ryan Homes, NVHomes and Heartland Homes brands. In order to serve home building customers, the company operates a mortgage banking and title services business. The Home building segment accounts for nearly 98% of its revenue with the balance coming from the Mortgage Banking segment.

In the last 90 days, The Zacks Consensus Estimate for 2020 dropped from $201.80 to $154.60 before going back up to $191.66. For 2021, the estimate dropped from $228.30 to $151.09 before reversing back to $206.93.

It topped estimates in each of the last four quarters by an average margin of 10.7%.

The shares are trading below their median P/E value over the past year, so there is room for appreciation.

TRI Pointe Group, Inc. (TPH - Free Report)

Headquartered in Irvine, CA, TRI Pointe Group designs, constructs and sells single-family homes, including the Maracay Homes in Arizona; Pardee Homes in California and Nevada; Quadrant Homes in Washington; Trendmaker Homes in Texas; TRI Pointe Homes in California and Colorado; and Winchester Homes in Maryland and Virginia.

In the last 90 days, The Zacks Consensus Estimate for 2020 went from $1.57 to $1.15 before nudging upwards to $1.19. For 2021, the estimate dropped from $1.71 to $1.34 and is currently $1.44.

It topped estimates in each of the last four quarters by an average margin of 30.2%.

The shares are trading above their median P/E value over the past year although they are off their annual high suggesting further room for expansion.

Universal Forest Products, Inc. (UFPI)

Headquartered in Grand Rapids, MI, UFP Industries is a holding company with its subsidiaries throughout North America, Europe, Asia and Australia. The company supplies wood, wood composite and other products in retail, industrial and construction markets. It belongs in the Zacks-classified Building products – wood industry, which is in the top 9% of 250+ Zacks classified industries.

The company currently has approximately 204 facilities and parcels of land located throughout the United States, Canada, Mexico, Europe, Asia and Australia. Of these facilities, approximately 8 facilities are closed and are currently listed for sale or are being leased.

In the last 90 days, The Zacks Consensus Estimate for 2020 went from $3.13 to $2.49 before moving up to $2.55. For 2021, the estimate dropped from $3.78 to $2.68 and is currently $2.87.

It topped estimates in each of the last four quarters by an average margin of 4.3%.

The shares are trading above their median P/E value over the past year although they are off their annual high suggesting further room for expansion.

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