New Home Sales Scale 10-Year High: Key Picks

The U.S. housing industry appears to be back on track after a few sluggish months, indicating gradual recovery on strong demand. Americans bought new homes in October at the fastest pace in a decade, reflecting the underlying strength of the economy.

October Housing Data

Per the latest report from the Commerce Department, new-home sales increased to a seasonally adjusted annual rate of 685,000 in October. This marks the second straight monthly gain, scaling their highest level in 10 years. Northeast and Midwest witnessed maximum increase, while the South and West registered less gains.

October sales figure increased 18.7% from a year ago and 6.2% from the prior month. It is to be noted that September’s sales pace was revised down to 645,000 units from the previously reported 667,000 units.

The recent increase in new home sales in the U.S. homebuilding and sales of previously owned homes suggests that the market is regaining momentum after hurricanes Harvey and Irma temporarily stalled activity (read more: Existing Home Sales Rise in October: Will the Rally Last?).

However, the industry has been challenged by shortage of homes for sale, suitable land and skilled labor. The inventory of new homes on the market was 282,000 units. It would take just 4.9 months to deplete the current supply of homes in the market. Limited land availability is driving prices higher, as average sales price of a new home jumped 13.6% year over year and 5% from the prior month to $400,200.

Nonetheless, housing/homebuilding has been on a high in recent times on solid home sales data, affordable interest/mortgage rates and impressive housing starts figure. Resilient job growth along with seemingly high homebuilders’ confidence are adding to the momentum.

New residential construction in the United States increased more than expected in October, reinstating strength in the housing industry. Per the latest jointly released report by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, constructions for new homes increased 13.7% in October 2017 to 1.29 million units (seasonally adjusted annual rate) from the prior month. This also marks the biggest surge in 12 months as housing starts witnessed big gains in single-family homes and apartments.

Again, confidence among homebuilders increased in November to its highest reading in eight months to 70 and second-highest since the recession (July 2005), according to the Housing Market Index by the National Association of Home Builders ("NAHB") and Wells Fargo.

Keeping in mind the positive momentum, we zero in on some housing stocks that have gained in the current scenario and have the potential to rise further before mortgage rates start rising.

Winning Stocks

With the help of the Zacks Stock Screener, we narrowed down the list four stocks in the Construction sector based on a good Zacks Rank and other relevant metrics.

Texas-based D.R. Horton, Inc. DHI is one of the leading national homebuilders. The company remains committed toward achieving continued double-digit annual growth in both revenues and pre-tax profits, while generating positive cash flow and improved returns.

D.R. Horton’s shares have returned 81% so far this year, outperforming the industry’s 63.6% rally. Estimates have moved north in the last 30 days for the current as well as for the next year by 2.6% and 8.2%, respectively. This bullish analysts’ sentiment justifies the stock’s current Zacks Rank #1 (Strong Buy) and why we are expecting the company to outperform in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.

The company is also expected to witness earnings growth of 17.3% for the current year, more than the industry average of 15.3%. The stock has a VGM Score of A.

Owens Corning OC is a Toledo, OH-based world leader in building materials systems and composite solutions. Its shares have gained more than 70% year to date, substantially outperforming its industry.

The Zacks Consensus Estimate for earnings for both the current year and the next have increased 1.4% and 4.3%, respectively, in the last 60 days, thus reflecting optimism in the stock’s prospects and substantiating its Zacks Rank #1. The company is also expected to witness earnings growth of 19.2% for the current year and 18.3% for 2018.

Norbord Inc. OSB is a producer of wood-based panels with operations primarily in the United States, Europe and Canada. The company’s shares have returned 38% year to date, outperforming the industry. Estimates have moved north in the last 60 days for the current as well as for the next year by 20.8% and 12.7%, respectively. The company, with a Zacks Rank #1, is expected to witness a robust earnings growth of 122.9% for 2017.

United Rentals, Inc. URI is one of North America's largest equipment rental companies. The stock also sports a Zacks Rank #1 and its shares have increased 45.2% so far this year, outperforming the industry.

Also, estimates have moved north in the last 60 days for the current as well as for the next year by 7.5% and 14%, respectively. The company, with a solid ROE of 44.8%, is also expected to witness earnings growth of 22.1% for 2017 and 17.3% for 2018.

Last, we picked NVR, Inc. NVR, involved in the construction and sale of single-family detached homes, townhomes and condominium buildings. The stock carries a Zacks Rank #2 (Buy) and has climbed more than 100% year to date, outperforming the broader industry. Estimates have moved north in the last 60 days for the current as well as for the next year by 5.6% and 8.6%, respectively.

The company is also expected to witness earnings growth of 41.3% for the current year and 13.9% for 2018. The stock’s rock solid trailing 12-month Return on Equity (ROE) ratio of 38.2%, compared with the industry average of 10.6%, indicates that the company reinvests more efficiently compared to its peer group.

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