6 Ways to Build Value With Homebuilding Stocks

In the recent volatile market, housing has been a standout for its stable, consistent gains, with many stocks in the sector at multi-year highs. Investment experts point to low interest rates and continued low unemployment and high consumer confidence as bullish props to this sector. Several MoneyShow.com contributors offer their favorite ideas in the homebuilding sector. Mike Cintolo, Cabot Top Ten Trader Lennar Corporation is the largest homebuilder in the U.S. Whether you are a first-time homebuyer (40% of Lennar's customer base), looking to move-up, want to live in an active adult community or are consolidating your family into a multi-generational home, Lennar can build something to suit your needs. Its entire model line includes a forward-thinking program called Everything's Included, which -- at no bump-up cost -- offers its customers a Wi-Fi package, some luxury finishes, and green building features such as Energy Star appliances and WaterSense faucets. Both its own efforts and (more importantly) the industry's upturn is beginning to pay off: Lennar earned $1.59 per share in the third quarter, beating analysts' estimates by $0.27, and while analysts still see the firm's bottom line falling for 2019 as a whole, forecasts have been rising and big investors are thinking the next year will be a lot better than the past one. Indeed, new orders in the recent quarter were up 9% in unit terms (up 3% in dollar terms), a pickup from the prior quarter. It looks like housing is in a recovery, which, combined with a cheap valuation (10 times earnings), is attracting buyers. If you're game, aim for modest dips to enter. Taylor Morrison Home Corp. is a small-cap homebuilder that serves a diverse array of consumer groups across the U.S. The company operates under two well-established brands, Taylor Morrison and Darling Homes, and additionally offers mortgage, title, closing and insurance services. Taylor Morrison closed on a $1 billion acquisition of AV Homes in October 2018; the integration of AV Homes was completed more quickly than management had projected, and the annualized cost synergies are now expected to be $50 million higher than originally anticipated. The company also announced their entry into the build-to-rent single-family home market through a partnership with Christopher Todd Communities. Despite a strong U.S. economy and financial successes throughout the homebuilding industry, 2018 was a poor year for homebuilder stocks. But TMHC has rebounded in 2019, and volume increased in the third quarter as the stock heads toward its January 2018 all-time high near $29. The stock has been impervious to recent market turbulence, having been on a steady uptick since late June. With no signs of slowing down, it's a good momentum buy. Joe Duarte, In the Money Options Shares of homebuilder KB Homes have rallied over 30% since their August 2019 breakout. And while some may see this type of run as more akin in the technology sector when the stars line up correctly, the shares may still have some upside left. Consider the fact that interest rates remain low and that we are in the midst of a multi-factored demographic shift. First, as hard to believe as it may be more millennials are reaching the age where families and homes are becoming more important than video games and other distractions. At the same time, empty nesters are looking to downsize. Meanwhile, interest rates remain low and, despite the continuous calls for a recession, by and large the economy remains in decent shape. Homebuilders, such as KB Homes -- which are targeting first-time homebuyers as well as those looking to downsize -- are in a sweet spot. In fact, the most recent earnings call from KB Homes pinpoints those two groups as their largest area of focus. Further, with tight housing supplies and still overpriced existing homes, new homes that are attractively priced and feature strong locations and amenities are in high demand while facing relatively small competition. Barring a major market economic event, and even though there may be some bumps along the way, KB Homes and other homebuilders should stay on the right side of the momentum curve. (For full disclosure, Joe Duarte owns shares of KB Homes as of this writing.) John Buckingham, The Prudent Speculator Shares of M.D.C. Holdings recently hit their highest price in more than a decade after the homebuilder reported preliminary net new order activity; additionally, the stock received multiple analyst upgrades and target price increases. The company said that for the first two months of third quarter, net new home orders increased an incredible 63% year over year to 1,418, compared with 868 for the same period in 2018. The increase was driven by a 40% improvement in the monthly sales absorption rate to 3.75 and a 17% increase in the average number of active subdivisions to 189. While interest rates recently increased, we are still very much at the low end of the historical range, which we expect to remain lower for longer, helping MDC as the cost of borrowing for both it and its potential customers remains quite attractive. The company sports a broad geographic footprint, boasts successful cost control initiatives and maintains a solid balance sheet, with ample liquidity that it can use to smartly acquire land in attractive markets. Additionally, we continue to like the company's focus on first-time buyers (many millennials) with its Season collection of homes. MDC Holdings has had a terrific 2019, returning more than 66% including dividends and we still believe that shares remain undervalued. The stock trades at around 11 times forward earnings estimates and offers investors a dividend yield of 2.6%. Christopher Graja, Argus Research We believe that annual economic growth of 2% in 2019 should continue to support the job market and give millennial-generation buyers the confidence to buy their first homes. We believe that D.R. Horton is well positioned to serve this market with its Express Homes brand, which offers homes at about $240,000, representing about 34% of closings and 2% of homebuilding revenue in third-quarter 2019. Based in Fort Worth, Texas the company the largest homebuilder in the U.S., with 51,857 closings for the fiscal year ended September 30, 2018. The company offers homes in 87 markets within 29 states. The Southeast was the biggest revenue contributor, with 29% of the total in FY 17. About 90% of revenue is from single-family detached homes We expect an acceleration in household formation in a strong job market. At the same time, we expect builders to emphasize home designs that are smaller and more efficient to build in order to keep prices affordable. This is an area where D.R. Horton appears to have an edge on many rivals. Almost 70% of the homes the firm has delivered in fiscal 2019 sold for under $300,000, a sign that the company is well positioned to serve the value-conscious buyers who are likely to drive the housing market over the next several years. We have conducted a detailed analysis of affordability and it is our conclusion is that we do not expect home prices to rise much faster than incomes over the next few years. We also expect large builders to take market share from smaller builders. We look for the stock to benefit from its range of brands for high-end and especially entry-level homebuyers. D.R. Horton should also benefit from its broad geographic diversification and healthy balance sheet. Douglas Gerlach, SmallCap Informer Manufactured homes today are a far cry from the stereotypical mobile homes of 20 years ago. Cavco Industries is one of the largest producers of manufactured homes in the United States, and a leading designer and builder of systems-built structures that include modular homes, commercial buildings, park model RVs, and vacation cabins. Interestingly, the processes and systems Cavco utilizes to build homes in its factories are inherently more efficient and environmentally beneficial than on-site construction methods. In addition, Cavco can build homes with substantial utilization of renewable materials and high-tech energy saving features, and that are designed for the use of solar and wind power. Since 2011, Cavco has seen revenues grow at an average annual rate of 12.7%. In the same period, EPS have grown at 303% on average each year. There is great demand for Cavco's homes. In 2018, manufactured housing accounted for 57% of all new homes sold under $200,000 and 84% of all new homes sold under $150,000. Two of every three manufactured homes are in rural areas. Approximately 9 million households with 22 million people currently live in manufactured homes that make up 9% of nation's single-family housing stock. While analysts on Wall Street project EPS growth as high as 30% over the next five years, we have calculated a conservative 12% rate of growth of revenues and EPS through 2023. From the current price, the upside-to-downside ratio is 5.2-to-1 and the annual total return is 15.4%.

6 Ways to Build Value With Homebuilding Stocks

Low interest rates, continued low unemployment and high consumer confidence are bullish props to this sector.

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