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March Builders' Confidence on a "Solid Footing": 5 Picks

Shrabana Mukherjee
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Homebuilders’ confidence data for March was solid. Does this imply that builders are shaking off worries associated with rising costs of materials owing to new tariffs on lumber, aluminum and steel as well as apprehensions related to higher mortgage rates? The latest reading surely points at renewed strength in the sector.

According to the latest report of the National Association of Home Builders (NAHB) and Wells Fargo, Housing Market Index reading is still very strong at 70. Homebuilder confidence in the United States saw a modest decrease (down 1 point from last month), as expected.

"Builders' optimism continues to be fueled by growing consumer demand for housing and confidence in the market," said NAHB Chairman Randy Noel, a custom homebuilder from LaPlace, Louisiana. "However, builders are reporting challenges in finding buildable lots, which could limit their ability to meet this demand."

Housing Market Index primarily reflects builders’ perceptions of current single-family home sales and sales expectations for the next six months. Notably, buyer traffic fell three points to 51. Sales prediction for the next six months dropped two points to 78. However, the component gauging current sales conditions remained unchanged from the previous month at 77.

Consumer Demand Remains Elevated

The latest report from the Mortgage Bankers Association or MBA shows that mortgage applications for new home purchases were 4.6% higher in February compared with a year ago and up 3% from January 2018, and inventory of previously-owned homes was at multi-decade lows.

U.S. homebuilding performed well in 2017, giving investors ample scope to rake in handsome gains. This year, the industry looks equally attractive, courtesy of solid economic growth and job market. Consistent job growth, growing interest from first-time homebuyers as well as high homebuilder confidence are adding to the momentum.

Yet, builders are concerned about growing labor shortage and limited land availability that are shrinking margins, thereby prompting them to push prices higher. Apart from concerns  related to a series of interest rate hikes by the Federal Reserve, homebuilders are now worried about higher material costs, thanks to newly imposed tariffs on aluminum and steel. These are restricting homebuilders from responding to growing demand.

Construction costs escalated in February, driven by price increases for a wide range of building materials including steel and aluminum, per the latest March report released by the Associated General Contractors of America of Labor Department. Association officials have also warned that newly imposed tariffs on these metals will create steeper increases that will squeeze budgets for infrastructure, school districts and commercial projects.

That said, consumer confidence, shot up to 130.8 in February, the best since November 2000 when it logged a reading of 132.60 — its highest level so far.

Robust economic conditions and impressive employment rate boosted consumer confidence. For the fifth month in a row, the jobless rate remained unchanged at 4.1% in February, a 17-year low. Improving economic growth supported by a better employment picture generally boosts housing activity and provides the basis for stronger demand.

With these economic fundamentals in place, the overall homebuilding picture is pretty encouraging for 2018.


Stocks to Bet On

Adding some housing stocks to your portfolio looks like a smart move at this point, as there are plenty of reasons to be optimistic about the broader housing sector over both the short and the long term. However, picking winning stocks may be difficult.

With the help of the Zacks Stock Screener, we have zeroed in on five stocks that have a Zacks Rank #1 (Strong Buy) or 2 (Buy) and favorable metrics. A top Zacks Rank indicates that these stocks have been witnessing positive estimate revisions, which generally translates into rapid price appreciation.

Boise Cascade Company BCC, a wood products manufacturer and building materials distributor, has an expected earnings growth rate of 36.7% for the current year. The Zacks Consensus Estimate for 2018 earnings has risen 17.6% over the last 30 days for this Zacks Rank #1 stock. You can see the complete list of today’s Zacks #1 Rank stocks here.

Louisiana-Pacific Corporation LPX is a manufacturer of building products primarily for new home construction and outdoor structures. The company sports a Zacks Rank #1 and has been witnessing upward estimate revisions for 2018 — up 36.6% — in the last 60 days. The Zacks Consensus Estimate projects EPS growth of 13.3% for 2018.

Potlatch Corporation PCH, also a Zacks Rank #1 stock, is an integrated forest products company with substantial timber resources. Earnings are expected to rise 26.3% in 2018. The stock has witnessed 9.6% upward revision in earnings estimates for 2018 over the last 60 days.

Meritage Homes Corporation MTH is one of the leading homebuilders in the United States. The Zacks Consensus Estimate for earnings for the current year has increased 8.6% in the last 60 days, thus reflecting optimism about the stock’s prospects and substantiating its Zacks Rank #2. The company’s EPS is expected to grow 30.4% in the current year.

Lyon William Homes WLH is primarily engaged in design, construction, marketing and sale of single-family detached and attached homes in California, Arizona, Nevada and Colorado. The company carries a Zacks Rank #2 and earnings estimates for the current year have also gone up by 10.5% in the last 30 days. It has an expected earnings growth rate of 38% for 2018.

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