U.S. Markets open in 6 hrs 42 mins

3 Stocks to Consider for the Next Residential Construction Rally

Signs of a slowing economy and weakness in jobs and manufacturing data are powering investors' expectations for lower interest rates.

The U.S. economy advanced at an annual rate of 2% in the second quarter of 2019, but it was 110 basis points lower than 3.1% growth in the first quarter and missed the preliminary estimate of 2.1%.

U.S. nonfarm payrolls grew by 130,000 jobs in August, but was down by 29,000 new jobs additions in July and was below market projections of 158,000.

The U.S. Manufacturing Purchasing Managers' Index of IHS Markit Ltd. (INFO), which measures the health of the U.S. manufacturing sector, dropped to 50.3 in August from 50.4 in July. Further, the reading was the weakest expansion pace in the manufacturing sector recorded in the past decade.

Therefore, in order to stimulate the U.S. economy, the Federal Reserve will likely proceed with another cut in the federal funds rate at the September meeting.

Lower interest rates are good for the economy because people have more consumption propensity and companies can finance their operations and investments through loan capital obtained at a cheaper rate. Higher spending and enhanced business activities increase profit, which drives stock prices higher.

One of the industries that will benefit the most from lower federal funds rates is the residential construction industry as people will have access to cheaper loans to buy new houses.

As a result, investors may want to increase their holdings of the following residential construction stocks that are expected to perform strongly over the next 52 weeks. In fact, these stocks have received overweight recommendations from Wall Street analysts.

In addition, these stocks seem cheap based on the Peter Lynch value.

Here are the results of my search.

The first company is Lennar Corp. (NYSE:LEN). The stock closed at $52.44 per share on Monday for a market capitalization of $16.49 billion. The share price has increased nearly 34% year to date, outperforming the S&P 500 Index by 15.2%.

The stock has a price-earnings ratio of 8.99 versus the industry median of 11.6, a price-book ratio of 1.12 versus the industry median of 0.86 and a price-sales ratio of 0.79 versus the industry median of 0.58.

The closing price on Monday was 40.6% above the 52-week low of $37.29 and 3.9% below the 52-week high of $54.5.

The Peter Lynch chart suggests the stock is cheap.

Sell-side analysts issued a buy recommendation rating for shares of Lennar with an average target price of $58.56.

In addition, GuruFocus assigned a rating of 5 out of 10 for the company's financial strength and a rating of 7 out of 10 for its profitability and growth.

Read more here:



The second company is Persimmon PLC (PSMMF). The stock closed at $23.74 per share on Monday for a market capitalization of $7.43 billion. The share price has decreased 1.6% year to date, underperforming the S&P 500 Index by 20.4%.

The stock has a price-earnings ratio of 6.9 versus the industry median of 11.16, a price-book ratio of 2.15 versus the industry median of 0.86 and a price-sales ratio of 1.62 versus the industry median of 0.58.

The closing price on Monday was 4.1% above the 52-week low of $22.8 and 54.3% below the 52-week high of $32.5.

The Peter Lynch chart suggests the stock is cheap.

Wall Street issued an overweight recommendation rating for shares of Persimmon with an average target price of $24.19.

Further, GuruFocus assigned a rating of 9.2 out of 10 for the company's financial strength and 8 out of 10 for its profitability.

The third company is LGI Homes Inc. (NASDAQ:LGIH). The stock closed at $79.9 per share on Monday for a market capitalization of $1.83 billion. The share price has increased nearly 77% year to date, outperforming the Nasdaq by 58%.

The stock has a price-earnings ratio of 13.85 versus the industry median of 11.16, a price-book ratio of 2.74 versus the industry median of 0.86 and a price-sales ratio of 1.3 versus the industry median of 0.58.

The closing price on Monday was 115%% above the 52-week low of $37.16 and 6.9% below the 52-week high of $85.41.

The Peter Lynch chart indicates the stock is cheap.

Analysts recommend LGI Homes with an overweight rating and an average target price of $76.80.

In addition, GuruFocus assigned a rating of 5.1 out of 10 for the company's financial strength and a rating of 6 out of 10 for its profitability.

Disclosure: I have no positions in any securities mentioned.

Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.

This article first appeared on GuruFocus.