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Vexed by a Rocky Homebuilding Market? 5 Value Stocks to the Rescue

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·6 min read
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Low inventory, supply-chain bottlenecks and the Fed’s anti-inflation efforts are making things worse for the homebuilding market. All these factors are pushing home prices higher, thereby making it even more expensive for consumers to buy homes.

The inventory of unsold existing homes slightly increased to 870,000 as of February-end, which equates to just 1.7 months of supply at the current monthly sales pace. For new homes, at February's sales pace, it would take 6.3 months to clear the supply of houses on the market, up from 6.1 months in January. Although supply has edged slightly higher, it remains difficult for buyers to find available homes.

Meanwhile, the re-emergence of COVID-19 in parts of Asia and Europe has been creating supply challenges in a number of categories, thereby pushing raw material prices higher for builders. According to an Associated Builders and Contractors analysis of the U.S. Bureau of Labor Statistics’ Producer Price Index data released recently, construction input prices increased 24.4% from a year ago for February 2022.

Again, after years of ultra-low interest rates, the cost of borrowing is also on the rise. The average interest rate for a 30-year mortgage has increased to 4.67% from 4.42% a week ago, according to the latest release by Freddie Mac.

The CoreLogic Home Price Index (HPI) Forecast shows that home prices rose 20% in February from a year ago. This marks the 12th consecutive month of double-digit gains. Home prices grew 2.2% from January 2022.

Nonetheless, analysts are cautiously optimistic about the housing market in the United States, given pent-up demand from low supply and high demand. Investors should note that despite the second straight monthly decline in sales of new U.S. single-family homes for February, reported by the Commerce Department, sales remained above the pre-pandemic level. Market pundits are of the opinion that the new homes market will likely improve gradually this year, given pent-up demand, tight supply and notable wage gains.

Investing in value stocks like Tri Pointe Homes, Inc. TPH, D.R. Horton DHI, Lennar Corp. LEN, M.D.C. Holdings, Inc. MDC and Taylor Morrison Home Corporation TMHC seems prudent, given their robust long-term growth parameters.

Focus on Value Stocks: Hedge Against Uncertainty

Given the uncertainty, it will be wise for investors to dedicate their funds to value stocks. Value investing has always been a common strategy. Historical data suggests that value stocks not only tend to outperform growth stocks but are relatively less volatile. Given that fundamentally-strong stocks are now available at a cheaper rate, it will be prudent for investors (specifically risk-averse investors) to grab stocks for long-term gains.

Our research shows that stocks with a Value Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy), offer the best opportunities in the value investing space. You can see the complete list of today’s Zacks #1 Rank stocks here.

Listed below are five homebuilder stocks that investors can consider amid these trying times.

Tri Pointe Homes: This Irvine, CA-based homebuilder has been gaining from higher pricing and improved operating leverage. Cost-cutting initiatives and focus on entry-level buyers have been adding to the positives.

Tri Pointe currently carries a Zacks Rank #1 and a Value Score of A. TPH shares have plummeted 29.2% year to date. Its trailing 12-month forward price-to-earnings (P/E) ratio of just 3.7 is lower than the industry’s 4.8. Earnings estimates for the current fiscal year have increased to $4.99 per share from $4.39 over the past 60 days, depicting analysts’ optimism over the stock’s prospects. The projected figure indicates a 21.1% year-over-year rise.

D.R. Horton: This Texas-based homebuilder is well positioned for 2022, courtesy of its industry-leading market share, solid acquisition strategy, well-stocked supply of land, lots and homes along with affordable product offerings across multiple brands.

D.R. Horton currently carries a Zacks Rank #2 and a Value Score of A. DHI shares have plummeted 31.7% year to date. Its trailing 12-month forward P/E ratio is 4.5. Earnings estimates for the current fiscal year have increased to $15.88 per share from $15.80 over the past 30 days, depicting analysts’ optimism over the stock’s prospects. The projected figure indicates a 39.2% year-over-year rise.

Lennar: This Miami, FL-based homebuilder continues to gain from effective cost control and focus on making its homebuilding platform more efficient, which in turn is resulting in higher operating leverage.

Lennar currently carries a Zacks Rank #2 and a Value Score of A. LEN shares have dropped 32.1% so far this year. Its trailing 12-month forward P/E ratio is just 4.6. Earnings estimates for the current fiscal year have increased to $16.43 per share from $16.29 over the past seven days. Lennar’s earnings are expected to rise 15.1% year over year in fiscal 2022.

M.D.C. Holdings: This Denver, CO-based homebuilder’s build-to-order operating model and focus on more affordable homes have been major driving factors.

MDC currently carries a Zacks Rank #2 and a Value Score of A. MDC shares have dropped 33.6% so far this year. Its trailing 12-month forward P/E ratio is just 3.4. Earnings estimates for the current year have increased to $10.61 per share from $10.37 over the past 60 days. MDC’s earnings are expected to rise 35.5% year over year in 2022.

Taylor Morrison Home: This Scottsdale, AZ-based homebuilder’s ongoing operational enhancements, acquisition synergies and robust pricing power have been more than offsetting the inflationary pressure and delay of some closings.

Taylor Morrison currently carries a Zacks Rank #2 and a Value Score of A. TMHC shares have dropped 24.5% so far this year. Its trailing 12-month forward P/E ratio is just 3.1. Earnings estimates for the current year have increased to $8.35 per share from $7.11 over the past 60 days. TMHC’s earnings are expected to rise 61.2% year over year in 2022.


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Lennar Corporation (LEN) : Free Stock Analysis Report
 
D.R. Horton, Inc. (DHI) : Free Stock Analysis Report
 
M.D.C. Holdings, Inc. (MDC) : Free Stock Analysis Report
 
Tri Pointe Homes Inc. (TPH) : Free Stock Analysis Report
 
Taylor Morrison Home Corporation (TMHC) : Free Stock Analysis Report
 
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