Is it nuts to buy a homebuilder stock right now? Shares of Ryland Group Inc. (RYL) sold off after mortgage rates spiked on fears of Fed tapering, but have since rebounded off of recent lows. It isn't for the faint of heart. Yet this Zacks Rank #1 (Strong Buy) has excellent fundamentals with double digit earnings growth and a forward P/E below the market average.
Ryland is one of the largest homebuilders in the United States. It operates in 14 states, including many of the key hot markets like Southern California and the Washington DC metro area.
Ryland has also been aggressively buying land. Over the last 2 years it has spent nearly $1 billion buying land, including in the lucrative Dallas market.
First Quarter Turnaround
If there was any doubt about the housing recovery, the first quarter dispelled it. On Apr 24, Ryland reported first quarter 2013 revenue had jumped 73.6% from a year ago. More importantly, new orders jumped 54.4% to 2,051 units from 1,328 units a year ago.
Backlog also rose 57.2% to 3,135 units from 1,994 units as of March 31, 2012. The average backlog price tells you how hot it is, as that rose to $289,000 from $250,000 a year ago.
Unlike some competitors, Ryland is uniquely positioned in the housing market to benefit from the move-up buyer both in price point and product line. The move-up buyer is vital to the housing recovery. She has historically been less price sensitive than the first time buyer, which should boost Ryland's sales during a time of rising mortgage rates.
Double Digit Earnings Growth Expected
Ryland lost money every year between 2007 and 2011 as the housing boom became a bust. In 2012, the company saw improvement as it managed to make $1.02.
Ryland is expected to see earnings growth of 189% in 2013 and another 24% in 2014 as earnings are projected to jump to $3.65. While it is quite the turnaround, it is a far cry from the housing boom's peak in 2006 of $7.95.
It paid for investors to own the homebuilders in 2012, including Ryland. Shares soared all year. The Homebuilder ETF (ITB) was the best performing ETF of the year.
But 2013 hasn't been quite as rosy. Shares recently saw a sharp sell off after the Fed and Ben Bernanke laid out a plan to taper QE. Investors sold the homebuilder stocks as mortgage rates rose, thinking that the sudden increase might put a damper on the housing recovery.
But so far, pending home sales are still at multi-year highs. Ryland is expected to report second quarter results on July 24 so there will be more guidance then.
Valuations Still Attractive
There's a myth that the homebuilders are now 'expensive' relative to where they were a year ago because the shares have popped. Missing in that analysis is that the earnings are also rising, making the shares of companies like Ryland still affordable.
Ryland has a forward P/E of just 13.2, which is under the average of the S&P 500 of 14.7. It also has a price-to-book of just 3.2 and a solid price-to-sales ratio of 1.4.
Owning a homebuilder stock is no longer the risk it was in 2010 and 2011. But for investors, that's a good thing. It means rising earnings and revenue growth for the next couple of years.
For those investors looking at all the homebuilders, Ryland is certainly one to put at the top of the list.
Want More of Our Best Recommendations?
Zacks' Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Then each week he hand-selects the most compelling trades and serves them up to you in a new program called Zacks Confidential.
More From Zacks.com