5 Homebuilders to Consider as Housing Prices Rise on Low Supply
- By Sydnee Gatewood
As real estate prices rise on the back of depressed supply and high demand, home buyers are finding it difficult to land a deal.
In March, the median price of existing homes sold was $329,100, a 17.2% increase from the prior-year period. While more homes have been coming on the market in recent weeks, the National Association of Realtors reported that closed sales of existing homes fell 3.7% to a seasonally adjusted annualized rate of 6.01 million units last month.
Homebuilders are also still producing new houses well below demand levels as prices for land, labor and materials increase under continued pressures related to the Covid-19 pandemic.
As a result of these developments, investors may want to look for investment opportunities among homebuilding companies that outperformed the Standard & Poor's 500 Index by at least 20% since the beginning of the year. As of April 26, the GuruFocus All-in-One Screener, a Premium feature, found several stocks had a higher return relative to the index for the period. It also looked for companies with a business predictability rank of at least one out of five stars, a price-earnings ratio below 15 and a 10-year revenue growth rate of at least 6%.
Stocks that met these criteria were D.R. Horton Inc. (DRI), KB Home (NYSE:KBH), Lennar Corp. (NYSE:LEN), M.D.C. Holdings Inc. (NYSE:MDC) and M/I Homes Inc. (NYSE:MHO).
D.R. Horton
D.R. Horton (DRI) has a market cap of $36.02 billion; its shares were trading around $99.92 on Monday with a price-earnings ratio of 11.58, a price-book ratio of 2.77 and a price-sales ratio of 1.53.
The GF Value of $73.34 and a price-to-GF Value ratio of 1.36 suggest the stock is significantly overvalued currently.
The valuation rank of 5 out of 10 indicates it is more fairly valued, however, even though the share price and price ratios are approaching multiyear highs.
GuruFocus rated the Fort Worth, Texas-based home construction company's financial strength 6 out of 10. Although the company has issued approximately $1.1 billion in new long-term debt over the past three years, it is at a manageable level. The robust Altman Z-Score of 6.01 also indicates it is in good standing as D.R. Horton's revenue and earnings have posted consistent growth.
The company's profitability scored an 8 out of 10 rating, boosted by operating margin expansion, returns that outperform a majority of competitors, a high Piotroski F-Score of 7, which implies business conditions are healthy, and a predictability rank of 3.5 out of five stars. According to GuruFocus, companies with this rank typically see their stock prices gain an average of 9.3% annually over a 10-year period.
Of the gurus invested in D.R. Horton, George Soros (Trades, Portfolio) has the largest stake with 1.02% of outstanding shares. Other top guru shareholders include Pioneer Investments (Trades, Portfolio), Jim Simons (Trades, Portfolio)' Renaissance Technologies, the Smead Value Fund (Trades, Portfolio), Ken Heebner (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and Ron Baron (Trades, Portfolio).
KB Home
KB Home (NYSE:KBH) has a $4.77 billion market cap; its shares were trading around $48.65 on Monday with a price-earnings ratio of 13.74, a price-book ratio of 1.73 and a price-sales ratio of 1.06.
According to the GF Value of $29.13 and price-to-GF Value ratio of 1.67, the stock is significantly overvalued currently.
The valuation rank of 4 out of 10 supports this assessment as the share price and price-sales ratio are closing in on 10-year highs.
The Los Angeles-based homebuilder's financial strength was rated 4 out of 10 by GuruFocus. While the Altman Z-Score of 3.62 indicates KB Home is in good standing, the return on invested capital is being eclipsed by the weighted average cost of capital, which suggests struggles with creating value.
KB Home's profitability fared better with a 6 out of 10 rating, driven by an expanding operating margin, strong returns that outperform over half of its industry peers and a moderate Piotroski F-Score of 5, which suggests business conditions are stable. Although revenue per share has declined over the past 12 months, the company still has a one-star predictability rank. GuruFocus says companies with this rank return an average of 1.1% annually.
With a 2.79% stake, Fisher is the company's largest guru shareholder. Pioneer, Donald Smith & Co, Hotchkis & Wiley and Joel Greenblatt (Trades, Portfolio) also have positions in the stock.
Lennar
Lennar (NYSE:LEN) has a market cap of $31.59 billion; its shares were trading around $103.40 on Monday with a price-earnings ratio of 10.55, a price-book ratio of 1.71 and a price-sales ratio of 1.36.
Based on the GF Value of $67.61 and price-to-GF Value ratio of 1.53, the stock appears to be significantly overvalued currently.
The valuation rank of 8 out of 10 leans more toward undervaluation, however, even though the share price and price-sales ratio are nearing multiyear highs.
Headquartered in Miami, the homebuilder's financial strength was rated 5 out of 10 by GuruFocus. While assets are building up at a faster rate than revenue is growing, the Altman Z-Score of 4.19 indicates Lennar is in good standing. The ROIC also surpasses the WACC, indicating good value creation.
Lennar's profitability fared even better with an 8 out of 10 rating, driven by expanding margins, strong returns that outperform competitors, a high Piotroski F-Score of 9 and a three-star predictability rank. While revenue per share growth has recently slowed, GuruFocus data shows companies with this rank return an average of 8.2% annually.
Barrow, Hanley, Mewhinney & Strauss is the company's largest guru shareholder with a 1.76% stake. Other gurus invested in the stock include Fisher, Smead, Simons' firm, Pioneer, Heebner, Baron, Grantham, Third Avenue Management (Trades, Portfolio), Ronald Muhlenkamp (Trades, Portfolio), John Hussman (Trades, Portfolio), Greenblatt, Murray Stahl (Trades, Portfolio), Ray Dalio (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio).
M.D.C. Holdings
M.D.C. (NYSE:MDC) has a $1.57 billion market cap; its shares were trading around $61.08 on Monday with a price-earnings ratio of 11.58, a price-book ratio of 2.03 and a price-sales ratio of 1.13.
The stock appears to be significantly overvalued based on its GF Value of $43.68 and price-to-GF Value ratio of 1.40.
GuruFocus rated the Denver-based homebuilder's financial strength 4 out of 10. Although the company has issued $133.1 million in new long-term debt over the past three years, the Altman Z-Score of 4.01 indicates it is in good standing.
Supported by an expanding operating margin and good returns, M.D.C. Holdings' profitability scored a 7 out of 10 rating. It also has a moderate Piotroski F-Score of 5 and a one-star predictability rank.
Of the gurus invested in M.D.C., Grantham has the largest stake with 0.23%. Fisher, Pioneer and Chuck Royce (Trades, Portfolio) also have positions in the stock.
M/I Homes
M/I Homes (NYSE:MHO) has a market cap of $1.77 billion; its shares were trading around $60.42 on Monday with a price-earnings ratio of 7.4, a price-book ratio of 1.38 and a price-sales ratio of 0.58.
According to the GF Value of $49.74 and price-to-GF Value ratio of 1.21, the stock appears to be modestly overvalued currently.
The valuation rank of 8 out of 10 leans more toward undervaluation, however, even though the share price and price-sales ratio are closing in on multiyear highs.
Headquartered in Columbus, Ohio, the homebuilder's financial strength was rated 6 out of 10 by GuruFocus. Although the company has issued approximately $84.9 billion in new long-term debt over the past three years, it is at a manageable level as a result of comfortable interest coverage. M/I also has a high Altman Z-Score of 3.82. The ROIC surpasses the WACC, indicating good value creation.
M/I Homes' profitability scored a 7 out of 10 rating, driven by expanding margins, strong returns that outperform a majority of industry peers, a moderate Piotroski F-Score of 5 and a one-star predictability rank.
With a 3.86% stake, Donald Smith & Co. is the company's largest guru shareholder. Hotchkis & Wiley, Simons' firm, Fisher, Hussman, Ainslie, Greenblatt and Pioneer also own the stock.
Disclosure: No positions.
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This article first appeared on GuruFocus.
