Despite August's weak homebuilder sentiment reading, the overall outlook for the homebuilding sector remains positive. New residential construction data was upbeat with housing starts rebounding in July after touching nine-month lows in June.
Additionally, building permits increased last month after declining for three months consecutively. Following these gains, the addition of companies from the homebuilding industry to one's portfolio might be suitable for investment.
New Residential Construction Remains Upbeat
Per the Census Bureau and Housing and Urban Development Department, new residential construction improved in July after a forgettable June performance. Housing starts rose to 1.168 million in July from the downwardly revised level of 1.158 million June.
Housing starts increased last month after the metric touched its lowest level since last September in June. Privately owned housing starts for single family nudged up by 0.9% to 862,000 in July. Starts rose across major geographical regions like the Midwest and South.
Moreover, building permits, which are an indicator of future housing activity prospects, increased from 1.292 million June to 1.311 million in July after three straight months of declines. The metric was also higher than the estimated level of 1,306 million and represents a 4.2% year-over-year increase. Further, permits for single-family residences advanced from June's revised figure of 853,000 to 869,000 in July.
NAHB Index Remains Above 50
Though the NAHB sentiment index has declined this month, it still remains above the 50 mark, indicating improvement in the sector. For sure, the NAHB/Wells Fargo builder sentiment index has declined from 68 in July to 67 in August, its lowest level in the last 11 months. But it is important to remember that any level above 50 indicates that builders' views on sale conditions are optimistic.
According to the NAHB Chairman Randy Noel, some of the concerns for homebuilders are lack of skilled labor, shortage of buildable lots and increasing construction costs. Additionally, the Trump administration imposing a duty of 20% on Canadian lumber imports last fall, compounded their woes.
However, all is definitely not lost as pointed by NAHB Chair Noel, when he said that homebuilders will continue to witness “strong demand for new housing,” supported by stable income and job growth, in addition to “rising household formations.”
Buy These 5 Best Stocks
As discussed, new residential construction data suggests that housing activity is clearly improving. This is borne out by the fact that SPDR S&P Homebuilders (XHB) and the broader Real Estate SPDR (XLRE) has gained 1% and 8.3%, respectively, in the last three months.
We have selected five stocks that are expected to emerge winners from a rebound in housing starts and building permits data. These stocks also flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Comfort Systems USA, Inc. FIX is a provider of mechanical installation, maintenance and replacement services for apartment complexes.
This Texas-based company has a Zacks Rank #1. The expected earnings growth rate for the current year is 56.32%. The Zacks Consensus Estimate for the current year has improved 6.3% over the last 30 days. Comfort Systems USA has gained 20.5% in the last three months.
D.R. Horton, Inc. DHI is a homebuilding company in East, Midwest, Southeast, South Central, Southwest, and West America.
This Texas-based company has a Zacks Rank #2. The expected earnings growth rate for the current year is 40.54%. The Zacks Consensus Estimate for the current year has improved 3.2% over the last 30 days. D.R. Horton has gained 7.1% in the last three months.
M.D.C. Holdings, Inc. MDC is involved in the homebuilding and financial service businesses.
This Colorado-based company has a Zacks Rank #2. The expected earnings growth rate for the current year is 46.90%. The Zacks Consensus Estimate for the current year has improved 13.5% over the last 30 days. M.D.C. Holdings has gained 4% in the last three months.
Patrick Industries, Inc. PATK is a major manufacturer of component products and distributor of building products and materials for manufactured housing.
This Indiana-based company has a Zacks Rank #2. The expected earnings growth rate for the current year is 46.07%. The Zacks Consensus Estimate for the current year has improved 3.1% over the last 30 days. Patrick Industries has gained 4.2% in the last three months.
Trex Company, Inc. TREX is a manufacturer and distributor of wood/plastic composite products, and related accessories for residential decking.
This Virginia-based company has a Zacks Rank #1. The expected earnings growth rate for the current year is 42.78%. The Zacks Consensus Estimate for the current year has improved 5.6% over the last 30 days. Trex has gained 38.7% in the last three months.
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