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Top Home Builders to Consider as More Renters Become Buyers

According to statistics from John Burns Real Estate Consulting (JBRC), a firm that tracks data points from hundreds of builders in the U.S., the number of new homes sold per week declined approximately 85% between the first week of March and the first week of April.

However, numbers unexpectedly began to pick back up again, reaching 35% of early-March levels for the week ended April 19.


"Just this week we have experienced an increase in sales, as well as continued website engagement activity," Stephan Paul, who serves as the executive vice president of Mid-Atlantic Builders, said.

Who are the buyers?

The U.S. Bureau of Labor Statistics reported that by April 23, U.S. unemployment levels had reached 20.6%, which is the highest unemployment level since the 2008 financial crisis. With JPMorgan Chase & Co. (JPM) estimating that U.S. gross domestic product could contract by as much as 40% while economies navigate how best to safely put an end to lockdown conditions without worsening the situation, who would be out buying a house?

For one, Covid-19 has made some hesitant to live in the city or move into a previously inhabited dwelling. Thus, as leases near their end, those who are secure in their finances may increasingly choose to move out of the city or to brand-new houses that have had no previous residents.

Another reason is because rental does not lead to ownership. For some, the declining economy has served as a wake-up call; when the lease is up, you do not own anything. Taking out a mortgage to buy a house slightly farther from the city is by far the better long-term investment than renting a downtown apartment for the same monthly price as mortgage payments.

Devyn Bachman, the manager of research at JBRC, reported that more of the month's new buyers were young couples with double income who were recent or current renters - in other words, people who feel secure in their employment and finances and are thinking about the long term.

For buyers who meet these conditions, there may be no better time to buy. In addition to the base interest rate of zero, prices are cheaper due to the slowdown in demand, creating bargains that just were not available in the bull market that lasted for more than a decade. "I do think consumers are hungry for a deal, especially the first-time buyers," Bachman said.

With the housing market bucking estimates of long-term sales decline, skewed in favor of new home builders, investors may want to consider keeping an eye on the following stocks, which represent financially strong and well-moated companies that mainly operate in new home construction.

NVR

Based in Reston, Virginia, NVR Inc. (NYSE:NVR) operates a homebuilding and sales unit under the Ryan Homes, NVHomes and Heartland Homes brands, as well as a mortgage banking unit. The company mainly operates on the U.S. east coast.

On April 27, shares of NVR traded around $2,991.40 apiece for a market cap of $11.07 billion and a price-earnings ratio of 13.78. After a year-to-date price drop of 25%, the stock is trading at a discount to intrinsic value according to the Peter Lynch chart.

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GuruFocus gives NVR a financial strength rating of 8 out of 10, a profitability rating of 10 out of 10 and a business predictability rating of five out of five stars.

The cash-debt ratio of 1.6 is higher than 82% of competitors, while the current ratio of 3.87 and interest coverage of 40.44 times also indicate a strong cash position. The Altman Z-Score of 10.62 indicates that the company is safe from bankruptcy.

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With an operating margin of 13.61%, a return on capital of 110.96% and a return on invested capital that is approximately seven times the weighted average cost of capital, NVR is a highly profitable company.

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PulteGroup

PulteGroup Inc. (NYSE:PHM) is based in Atlanta and is the third-largest U.S. homebuilder by volume, with operations in 23 states. The company builds under the brand names Pulte Homes, Centex, Del Webb, DiVosta and John Wieland. It also owns a subsidiary mortgage business.

On April 27, shares of PulteGroup traded around $27.43 for a market cap of $7.33 billion and a price-earnings ratio of 7.14. According to the Peter Lynch chart, the stock is undervalued after its 33% drop year to date.

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PulteGroup has a GuruFocus rating of 7 out of 10 for financial strength, 8 out of 10 for profitability and one out of five stars for business predictability.

The cash-debt ratio of 0.59 is in line with the industry average, but the current ratio of 5.55 indicates a strong short-term liquidity position. The Altman Z-Score of 3.17 suggests that the company is unlikely to go bankrupt in the next two years.

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In terms of profitability, ROIC nearly triples WACC. The operating margin of 13.38% and return on capital of 22.26% are beating 64% of competitors.

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D.R. Horton

D.R. Horton Inc. (NYSE:DHI) has been the largest U.S. homebuilder by volume since 2002. Based in Arlington, Texas, the company builds under the brand names D.R. Horton, Express Homes, Emerald Homes and Freedom Homes, each of which targets different demographics of buyers. The company also has a mortgage arm.

On April 27, shares of D.R. Horton traded around $42.12 apiece for a market cap of $15.49 billion and a price-earnings ratio of 9. The Peter Lynch chart suggests that the stock is undervalued after its 22% year-to-date price drop.

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GuruFocus gives D.R. Horton a financial strength rating of 6 out of 10, a profitability rating of 8 out of 10 and a business predictability rating of one out of five stars.

The cash-debt ratio of 0.41 is higher than the company's historical median of 0.18, while the current ratio of 10.08 suggests ample short-term liquidity. The Altman Z-Score of 4.69 indicates safety from bankruptcy.

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D.R. Horton has an operating margin of 12.1% and a return on capital of 20.09%. The ROIC nearly doubles the WACC.

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Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research or consult registered investment advisors before taking action in the stock market.

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This article first appeared on GuruFocus.