U.S. Markets closed

3 Stocks to Consider as Home Builder Confidence Hits 20-Year High

Christopher Vargas

Home builder confidence in the newly built, single-family home market jumped 5 points in December to 76. This was the highest reading since June 1999, according to the National Association of Home Builders/Wells Fargo Housing Market Index.

A strong domestic economy and a housing shortage helped drive the confidence to the highest level in two decades. “Builders are continuing to see the housing rebound that began in the spring, supported by a low supply of existing homes and low mortgage rates,” NAHB Chairman Greg Ugalde said in a statement.

Let’s take a look at a few stocks that can potentially capitalize on the favorable conditions…

D.R. Horton DHI is the one of the largest homebuilders in the United States, with operations in 90 markets and 29 states. In the company’s recently reported fiscal 2019, 68% of its home sales were in the sub-$300,000 price point. First time homebuyers accounted for over 50% of sales.

The homebuilder has seen its shares climb around 55% in 2019, outperforming its broader industry’s 41% run. D.R. Horton trades at around 10.9X its forward earnings, which is just below the industry average of 11.8X forward earnings. In addition, the company has steadily raised its dividend over the past five years and it currently yields 1.28%.

Our consensus estimates for Q1 call for a top-line gain of 7.7% to $3.77 billion and a bottom-line hike of over 21% to $0.92 per share. D.R. Horton’s earnings estimates have been revised higher recently, helping earn DHI stock a Zacks Rank #2 (Buy).

M/I Homes MHO shares have nearly doubled in 2019 to dwarf the S&P 500’s 26% run. MHO is coming off a third quarter where sales increased 15% and earnings rose 30%. M/I Homes sold a record 1,721 homes during the third quarter, which was a 32% improvement from the year ago quarter.

Our Q4 Zacks consensus estimate anticipates earnings to grow over 40% to $1.85 per share and for revenue to jump 14% to $824 million. MHO stock trades at around 8.3X forward earnings, which puts it at a discounted level compared to the industry average of 11.8X. The stock’s discounted forward multiple could provide a solid entry point for investors looking to ride the momentum of a homebuilder that has skyrocketed this year. 

Meritage Homes MTH is another homebuilder that has benefited from the favorable macroeconomic conditions. MTH shares have soared over 70% YTD and is coming off a third quarter that saw home closing revenue climb 7% and diluted earnings rally 35%. Total orders rose 24% in the third quarter as well.

Meritage Homes has also tried to focus on the shortage of entry-level homes in the housing market as its average sales price dropped 4%. The company also delivered 54% order growth in the entry-level market with the company’s LiVE.NOW. Homes.

While our estimates forecast moderate gains in the fourth quarter, our Q1 estimates tell a different story. Q1 estimates call for sales to rise 13.5% to $792.6 million and for earnings to soar over 67% to $1.09 per share. Looking even further down the line, our fiscal 2020 estimates predict total sales to reach $3.85 billion for a 9% bump and for earnings to climb over 20% to $5.68 per share. MTH sports a Zacks Rank #1 (Strong Buy) and is a good stock to consider for investors looking to cash in on the growth in entry level homes.

Looking for Stocks with Skyrocketing Upside?

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.

Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.

See the pot trades we're targeting>>

Click to get this free report D.R. Horton, Inc. (DHI) : Free Stock Analysis Report M/I Homes, Inc. (MHO) : Free Stock Analysis Report Meritage Homes Corporation (MTH) : Free Stock Analysis Report To read this article on Zacks.com click here.