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Top 5 Stocks to Buy Now on Solid Homebuilder Confidence

Zacks Equity Research

Homebuilders’ confidence increased in January, providing some respite after two months of sharp declines to the lowest level in more than two years. The gradual decline in borrowing costs over the past few weeks along with strong job market has been boosting builders’ sentiment.

Per the National Association of Home Builders or NAHB/Wells Fargo Housing Market Index (HMI), the confidence level of the nation's homebuilders grew two points to 58. Notably, all three HMI components — current sales, future sales and buyer traffic — rose from the prior month. The index measuring current single-family home sales increased two points to 63. Home sales prospects for the next six months grew three points to 64 and buyer traffic surged one point to 44.

Declining Mortgage Rates a Positive

Per Freddie Mac’s Primary Mortgage Market Survey, in the week ending Jan 10, 2019, the fixed rate mortgage average came in at 4.45%, a decline of 6 basis points from Jan 3, 2019. Notably, the said rate was lowest in the past nine months.

Meanwhile, mortgage applications have also been increasing in response to the gradual decline in borrowing costs. As per the recent Mortgage Bankers Association's (“MBA”) weekly Mortgage Applications Survey, applications volume increased 13.5% in the week ending Jan 16, 2019 from one week earlier.

In the words of MBA Senior Vice President and Chief Economist, Mike Fratantoni, "Mortgage applications rose to their strongest level in years last week, with purchase applications rising to the highest since 2010, and refinance applications up to their highest level since last spring,"

Apart from the abovementioned much-needed housing tailwinds, the unemployment rate was 3.9% last month. Unemployment rate was 2 points below the December 2017 level.  

The positive momentum that the housing industry is currently experiencing is reflected in its share price performance. The Zacks Building Products - Home Builders industry has outperformed the broader S&P 500 in the past six months. The industry has collectively gained 9.9% against the S&P 500 Index’s 5.6% decline.

Lower Input Costs to Boost Housing Market

Higher construction costs have been putting pressure on the bottom lines of many homebuilding companies. Nonetheless, per the Associated Builders and Contractors analysis of U.S. Bureau of Labor Statistics data released on Jan 15, 2019, construction input prices declined 1.7% in the month of December from November. Notably, non-residential construction prices fell 1.6% month over month. Although rising wages and input prices have been weighing on builders’ sentiments over the past several quarters, the current data is reinstating investors’ lost confidence.

5 Top Construction Picks

In view of the aforementioned positives, we have selected five companies that investors may choose to bet on. We have chosen the stocks with the help of the Zacks Stock Screener.  These stocks carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Taylor Morrison Home Corporation TMHC currently carries a Zacks Rank #2. The Zacks Consensus Estimate for this Scottsdale, AZ based homebuilder for 2019 earnings is pegged at $2.63 per share, indicating 18.5% growth year over year.

Gibraltar Industries, Inc. ROCK currently sports a Zacks Rank #1. The Zacks Consensus Estimate for 2019 earnings of this leading manufacturer and distributor of building products is pegged at $2.43 per share, indicating 17.2% growth year over year.

Armstrong Flooring, Inc. AFI currently carries a Zacks Rank #2. The Zacks Consensus Estimate for 2019 earnings of this designer and manufacturer of flooring solutions company is pegged at 53 cents per share, indicating 23.6% growth year over year.

Lennox International Inc. LII currently carries a Zacks Rank #2. The Zacks Consensus Estimate for 2019 earnings of this provider of climate control solutions is pegged at $12.28 per share, projecting an impressive 30.7% growth year over year.

Arcosa, Inc. ACA, a manufacturer which serves infrastructure-related products and services to construction, energy and transportation markets, currently carries a Zacks Rank #2. The Zacks Consensus Estimate for 2019 earnings is pegged at $1.8 per share, indicating 3% growth year over year.

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