In this article, we discuss 10 best home builder stocks to buy now. If you want to see more stocks in this selection, check out 5 Best Home Builder Stocks To Buy Now.
The United States housing market is experiencing a drastic drop in home prices and simultaneously, the demand from buyers is also contracting. This is primarily due to potential home buyers reaching their affordability ceiling with the soaring mortgage rates. Similarly, sellers do not want to give up their houses, as they enjoy significantly lower fixed mortgage rates. Bloomberg cited Kelly Mangold of RCLCO Real Estate Consulting, in a report dated September 20:
“While there is no lack of demand from households seeking to purchase, many of these same buyers cannot afford the high prices these new homes command with mortgage rates where they stand today.”
Housing prices in the US have taken a turn for the worst and are indicating the largest monthly declines since 2009. The skyrocketing mortgage rates have driven affordability to the lowest level since the 1980s. While prices are declining on a month-over-month basis, they still remain significantly elevated, and are way greater than last year, when the buying frenzy was strong.
Firms like Goldman Sachs, Wells Fargo, Morgan Stanley, Moody's Analytics, Capital Economics, Zonda, Zelman & Associates, Fannie Mae, and John Burns Real Estate Consulting believe that the sharpest home price declines are yet to be seen. This correction in the housing market will result in demand eventually picking up for new residential construction, renovations, and remodeling in the near future. However, home builder stocks are currently trading at large discounts, which makes it a good idea to pick them up before share prices shoot higher. Some of the best home builder stocks to buy now include Vulcan Materials Company (NYSE:VMC), Builders FirstSource, Inc. (NYSE:BLDR), and Carlisle Companies Incorporated (NYSE:CSL).
We selected the best home builder stocks based on positive analyst coverage, strong business fundamentals, and growth prospects once the housing market gains momentum. We have assessed the hedge fund sentiment from Insider Monkey’s database of 895 elite hedge funds tracked as of the end of the second quarter of 2022.
Best Home Builder Stocks To Buy Now
10. Latham Group, Inc. (NASDAQ:SWIM)
Number of Hedge Fund Holders: 13
Latham Group, Inc. (NASDAQ:SWIM) is a New York-based company that designs, manufactures, and markets residential swimming pools in North America, Australia, and New Zealand. The company offers in-ground swimming pools, pool covers, and pool liners.
Baird analyst Timothy Wojs on August 12 reiterated an Outperform rating on Latham Group, Inc. (NASDAQ:SWIM) but lowered the price target on the shares to $10 from $12. The analyst said Latham Group, Inc. (NASDAQ:SWIM) posted mixed Q2 results and slashed 2022 revenue/EBITDA guidance, citing the macro pressure on demand and destocking in vinyl packaged pools. However, the analyst noted that Latham Group, Inc. (NASDAQ:SWIM)’s valuation is favorable and the company has secular growth potential.
According to Insider Monkey’s data, 13 hedge funds were bullish on Latham Group, Inc. (NASDAQ:SWIM) at the end of the second quarter of 2022, compared to 15 funds in the prior quarter. Richard S. Meisenberg’s ACK Asset Management is the largest stakeholder of the company, with 1.50 million shares worth $10.4 million. In addition to Vulcan Materials Company (NYSE:VMC), Builders FirstSource, Inc. (NYSE:BLDR), and Carlisle Companies Incorporated (NYSE:CSL), Latham Group, Inc. (NASDAQ:SWIM) is one of the best home builder stocks to invest in. Here is what Baron Funds has to say about Latham Group, Inc. (NASDAQ:SWIM) in its Q2 2021 investor letter:
“In the most recent quarter, we participated in the IPO of Latham Group, Inc., the largest manufacturer of fabricated pools globally. We believe this company is well positioned to benefit from several multi-year tailwinds including anticipated strength in the U.S. housing market, a cyclical recovery in new pool construction, and a secular growth opportunity as the company’s fiber glass pools offer several advantages versus most other pool options (concrete and vinyl, for example) including lower costs and maintenance, faster build times, and higher manufacturer profitability.”
9. Summit Materials, Inc. (NYSE:SUM)
Number of Hedge Fund Holders: 15
Summit Materials, Inc. (NYSE:SUM) is a Colorado-based company that produces and sells construction materials to the public infrastructure, residential, and non-residential end markets. The company's products include aggregates, cement, ready-mix concrete, asphalt paving mixes, and concrete products. For the full-year 2022, Summit Materials, Inc. (NYSE:SUM) reiterated its adjusted EBITDA guidance of approximately $500 million to $530 million. Summit Materials, Inc. (NYSE:SUM) is one of the best home builder stocks to buy now.
On October 10, Citi analyst Anthony Pettinari maintained a Buy recommendation on Summit Materials, Inc. (NYSE:SUM) but lowered the price target on the shares to $29 from $35. The analyst trimmed estimates in North America building products ahead of the Q3 earnings season to factor in weak residential demand, ongoing cost pressure, unsuitable weather, and labor and material availability constraints. Within building products, the analyst leans towards aggregates producers as he anticipates increased public construction to significantly offset slow residential demand.
According to Insider Monkey’s second quarter database, 15 hedge funds were bullish on Summit Materials, Inc. (NYSE:SUM), compared to 21 funds in the prior quarter. Israel Englander’s Millennium Management is the largest stakeholder of the company, with 893,982 shares worth nearly $21 million.
Here is what Carillon Eagle Small Cap Growth Fund has to say about Summit Materials, Inc. (NYSE:SUM) in its Q2 2022 investor letter:
“Summit Materials is a vertically integrated construction materials-based company that supplies aggregates, cement, ready-mix concrete, and asphalt in the United States and British Columbia. Fears of a potential economic slowdown and a corresponding cooling in construction activity weighed on the company’s shares in the quarter. However, Summit has made noteworthy strides in optimizing its business portfolio through the divestiture of underperforming assets, allowing it to drive margins higher through efficiency gains and accretive acquisitions. Summit also is the beneficiary of ongoing migration trends favoring construction activity in the exurban and rural markets it primarily serves.”
8. Masonite International Corporation (NYSE:DOOR)
Number of Hedge Fund Holders: 19
Next on our list of the best home builder stocks is Masonite International Corporation (NYSE:DOOR), a company that designs, manufactures, and sells interior and exterior doors for construction and repair, renovation, and remodeling sectors of the residential and non-residential construction markets worldwide.
On August 10, RBC Capital analyst Mike Dahl raised the price target on Masonite International Corporation (NYSE:DOOR) to $99 from $90 and kept an Outperform rating on the shares after its Q2 earnings beat. The company is facing demand slowdown on "solid footing" given its price/cost favorability and "reasonable" FY22 outlook, the analyst told investors in a research note. He added that Masonite International Corporation (NYSE:DOOR) trades at an "attractive valuation" of 5.4-times his new forecasted FY23 EBITDA.
According to Insider Monkey’s data, 19 hedge funds were long Masonite International Corporation (NYSE:DOOR) at the end of Q2 2022, compared to 20 funds in the prior quarter. Kevin Oram and Peter Uddo’s Praesidium Investment Management Company is the leading position holder in the company, with 1.5 million shares worth $114.2 million.
7. BlueLinx Holdings Inc. (NYSE:BXC)
Number of Hedge Fund Holders: 20
BlueLinx Holdings Inc. (NYSE:BXC) was incorporated in 2004 and is headquartered in Marietta, Georgia. The company distributes residential and commercial building products in the United States, as well as providing value-added services and solutions to customers and suppliers. BlueLinx Holdings Inc. (NYSE:BXC) caters to dealers, specialty distributors, national home centers, and manufactured housing customers through a chain of distribution centers.
On October 3, BlueLinx Holdings Inc. (NYSE:BXC) announced that it had acquired privately-held Vandermeer Forest Products for $67 million. As per BlueLinx Holdings Inc. (NYSE:BXC), the deal was financed via cash on hand and is expected to be immediately accretive to earnings per share.
Craig-Hallum analyst Greg Palm on August 4 reaffirmed a Buy recommendation on BlueLinx Holdings Inc. (NYSE:BXC) but trimmed the price target on the shares to $127 from $138. The analyst noted that BlueLinx Holdings Inc. (NYSE:BXC) posted strong Q2 results and provided a generally constructive outlook, even as it's obvious that the backdrop for housing has weakened significantly over recent months. The analyst does not think a slowdown in housing is as negative as investors believe.
According to Insider Monkey’s second quarter database, 20 hedge funds were bullish on BlueLinx Holdings Inc. (NYSE:BXC), compared to 22 funds in the earlier quarter. Travis Cocke’s Voss Capital is the biggest position holder in the company, with 460,900 shares worth $30.8 million.
Here is what Voss Capital has to say about BlueLinx Holdings Inc. (NYSE:BXC) in its Q3 2021 investor letter:
“We believe those calling for a peak in housing activity have grown too cautious too soon. Most of the bearish arguments we encounter appear more sentiment based, e.g., prices have come too far too fast. Setting aside this understandably inherent acrophobia-induced caution and focusing more squarely on empirical evidence, the supply/demand picture remains on solid footing thanks to continued record low housing inventory accompanying fresh 30-year lows in single family and multifamily vacancies.6 Furthermore, roughly 2 million more people will turn 35 years old annually over the next five years, as compared to the previous five years. Since 35 is the peak first time home buying age, we believe there will be sustained demand for years to come. Our long portfolio remains heavily geared to entry-level housing related companies, as well as those tied to home remodeling.
One of our preferred ways to express this bullish thematic view is through BlueLinx Holdings Inc. (BXC). We knew investors had been bracing for a profit collapse on the back of a fast 73% decline in lumber prices that occurred from May to September, but we had a differentiated view based on the company’s earnings mix that is skewed to Specialty products with less volatile pricing as opposed to purely commoditized framing lumber. The stock continues to be overly discounted based on apathy, ambiguity, and fear over the housing cycle. By our math, even in the unlikely event that BXC’s Structural Products segment produces $0.00 in gross profits over the next year (compared to $187.7M LTM) and their Specialty segment revenue declines 5-10% from here, the company still has sustainable earnings power in excess of $12 per share. At 10x earnings, a modest discount to the company’s long-term P/E ratio despite the balance sheet being deleveraged, the stock still has 63% upside. A more reasonable earnings power estimate is in the $16.50-$19.00 range, which puts the stock under 4x fully taxed net income. Unfortunately, the Board did not pull the trigger on any of their authorized share buybacks last quarter before the stock rose 50% after earnings. If they sharpen their pencils anytime soon and buy stock back at this depressed valuation, the normalized EPS number should only move higher.”
6. Armstrong World Industries, Inc. (NYSE:AWI)
Number of Hedge Fund Holders: 24
Armstrong World Industries, Inc. (NYSE:AWI) is headquartered in Lancaster, Pennsylvania, operating as a designer, manufacturer, and seller of ceiling systems for use in the construction and renovation of residential and commercial buildings in the United States, Canada, and Latin America. The company operates through Mineral Fiber and Architectural Specialties segments. Deutsche Bank analyst Joseph Ahlersmeyer initiated coverage of Armstrong World Industries, Inc. (NYSE:AWI) with a Buy rating and a $125 price target on August 17.
According to Insider Monkey’s second quarter database, 24 hedge funds held stakes worth $601 million in Armstrong World Industries, Inc. (NYSE:AWI), compared to 32 funds in the last quarter worth $754 million. William Von Mueffling’s Cantillon Capital Management is the biggest stakeholder of the company, with 1.78 million shares valued at $133.5 million.
Like Vulcan Materials Company (NYSE:VMC), Builders FirstSource, Inc. (NYSE:BLDR), and Carlisle Companies Incorporated (NYSE:CSL), Armstrong World Industries, Inc. (NYSE:AWI) features as one of the best home builder stocks to invest in.
Here is what Black Bear Value Partners has to say about Armstrong World Industries, Inc. (NYSE:AWI) in its Q1 2021 investor letter:
“AWI is a 129-year old designer and manufacturer of commercial and residential ceiling, wall, and suspension systems. 95% of their sales are for commercial use with the majority (70%) for repair and remodel (R&R). This translates to less sensitivity to new construction as R&R is a more stable revenue stream.
The US ceiling industry is consolidated with the top 3 companies controlling 98% of the market. AWI is the market leader with 65% market share
Despite COVID related shutdowns AWI managed to generate ~$250MM in FCF which at today’s price equates to ~6% FCF yield. They have experienced sequential improvement in their end markets and should see more improvement as the world reopens.
AWI should be able to generate $4-$5 in annual free cash flow which implies a current yield of 5-6% that should be able to grow 5-7% per year over the long-run. This is an excellent business at a cheap price.”
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Disclosure: None. 10 Best Home Builder Stocks To Buy Now is originally published on Insider Monkey.