Philip van Doorn

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March 19, 2019, 7:47 a.m. EDT

These stats say now may be the time to buy home-builder stocks

Decline in interest rates and rise in wages sets up good times for this cyclical industry

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By Philip van Doorn, MarketWatch

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Those actions helped lead to a decline in mortgage rates, which seems to be providing a bounce for the homeuilders. Here’s how the national average rate for 30-year mortgage loans has fluctuated over the past year, according to Freddie Mac data:


FactSet

So 30-year mortgage loan rates are even lower than they were a year ago.

Home construction permit volume “started having pretty ugly numbers in November and December, and rebounded in January. What you see now is sentiment going from macro recession, with [construction] starts down meaningfully, to the sentiment that we will have moderate growth in 2019, Lacayo said.

U.S. housing starts were up a seasonally adjusted 18.6% in January from a year earlier, while permit volume increased 1.4%.

Industry valuations

“Tangible book value tends to be a reliable floor” for homebuilder stocks, Lacayo said. “The only time they broke book value [as a group] was in 2008.”

For home builders, book value is generally the value of “inventory,” or the land the company has purchased to build on, Lacayo explained. Tangible book value subtracts goodwill, which is a noncash item that represents the premium paid if a builder acquires a competitor.

Looking at most of the stocks’ valuations, it would appear that late last year investors were expecting a 2008-like residential real-estate crisis. Even now, valuations are much lower than they were at the end of 2017.

Price/ tangible book value
Home builder Ticker March 14, 2019 Dec. 31, 2018 Dec. 31, 2017
William Lyon Homes Class A 0.8 0.5 1.6
M/I Homes Inc. /zigman2/quotes/200736509/composite MHO 0.9 0.7 1.3
TRI Pointe Group Inc. /zigman2/quotes/204302452/composite TPH 1.0 0.8 1.5
Meritage Homes Corp. /zigman2/quotes/209069331/composite MTH 1.0 0.8 1.3
KB Home /zigman2/quotes/206220859/composite KBH 1.0 0.9 1.4
Toll Brothers Inc. /zigman2/quotes/201912487/composite TOL 1.1 1.0 1.6
M.D.C. Holdings Inc. /zigman2/quotes/203145113/composite MDC 1.1 1.0 1.3
Lennar Corp. Class A /zigman2/quotes/202536373/composite LEN 1.4 1.3 2.0
PulteGroup Inc. /zigman2/quotes/201694804/composite PHM 1.6 1.5 2.4
D.R. Horton Inc. /zigman2/quotes/202032328/composite DHI 1.7 1.4 2.5
LGI Homes Inc. /zigman2/quotes/202461766/composite LGIH 2.0 1.6 3.4
Cavco Industries Inc. /zigman2/quotes/206244792/composite CVCO 2.6 2.8 3.9
NVR Inc. /zigman2/quotes/209548385/composite NVR 5.5 5.0 8.3
Source: FactSet

Looking ahead

Annual home price appreciation “has been 5% to 6% the past five years. Now you see it moderating at 4%,” Lacayo. He called this level sustainable, because of improved affordability indicated by the extraordinary improvement in U.S. wage growth to 3.4%.

Read: At a 10-year high, wage growth for American workers likely to keep accelerating

Lacayo publishes research on building-products companies, home-improvement retailers and home builders. He has a neutral rating on TRI Pointe Group /zigman2/quotes/204302452/composite TPH -4.07% , which is on the above list. He has “buy” ratings on Home Depot /zigman2/quotes/208081807/composite HD -0.10%  and Lowe’s /zigman2/quotes/205563664/composite LOW -0.45% .

When asked which of the homebuilder stocks listed here he favors, he named Lennar /zigman2/quotes/202536373/composite LEN -2.16% , although he doesn’t publish research on this company. “They are coming off their acquisition of CalAtlantc last year. This allows them to capture synergies, which should support their overall profits. This also gives them a larger market share in major metro areas. You also have a best-in-class management team,” he said.

Here’s a summary of sell-side analyst opinion about all 13 home builders, sorted by percentage of “buy”or equivalent ratings:

Home builder Ticker Share 'buy' ratings share 'hold' ratings Share 'sell' ratings Closing price - March 14 Consensus price target Implied 12-month upside potential
Lennar Corp. Class A /zigman2/quotes/202536373/composite LEN   86% 14% 0% $48.02 $56.61 18%
LGI Homes Inc. /zigman2/quotes/202461766/composite LGIH   67% 33% 0% $57.70 $63.40 10%
D.R. Horton Inc. /zigman2/quotes/202032328/composite DHI   57% 43% 0% $40.80 $43.94 8%
Cavco Industries Inc. /zigman2/quotes/206244792/composite CVCO   50% 50% 0% $121.16 $166.50 37%
TRI Pointe Group Inc. /zigman2/quotes/204302452/composite TPH   27% 64% 9% $12.85 $13.67 6%
M.D.C. Holdings Inc. /zigman2/quotes/203145113/composite MDC   27% 64% 9% $28.47 $30.68 8%
Meritage Homes Corp. /zigman2/quotes/209069331/composite MTH   25% 58% 17% $43.39 $46.11 6%
William Lyon Homes Class A   25% 75% 0% $15.13 $15.67 4%
Toll Brothers Inc. /zigman2/quotes/201912487/composite TOL   24% 67% 9% $36.15 $38.07 5%
PulteGroup Inc. /zigman2/quotes/201694804/composite PHM   16% 58% 26% $27.09 $26.40 -3%
KB Home /zigman2/quotes/206220859/composite KBH   15% 65% 20% $23.65 $23.28 -2%
NVR Inc. /zigman2/quotes/209548385/composite NVR   14% 86% 0% $2,722.77 $2,661.25 -2%
M/I Homes Inc. /zigman2/quotes/200736509/composite MHO   0% 100% 0% $26.20 $29.00 11%
Source: FactSet

As always, if you see any companies listed here that interest you, it’s important to do your own research and form your own opinion about whether now is the time to buy the stock.

Don’t miss: Want to ride the health-care stock wave? Here are 19 companies growing sales rapidly

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/zigman2/quotes/200736509/composite
US : U.S.: NYSE
$ 32.44
-1.58 -4.64%
Volume: 14,331
July 9, 2020 10:46a
P/E Ratio
6.65
Dividend Yield
N/A
Market Cap
$970.36 million
Rev. per Employee
$1.68M
loading...
/zigman2/quotes/204302452/composite
US : U.S.: NYSE
$ 14.85
-0.63 -4.07%
Volume: 234,732
July 9, 2020 10:46a
P/E Ratio
8.76
Dividend Yield
N/A
Market Cap
$2.02 billion
Rev. per Employee
$2.27M
loading...
/zigman2/quotes/209069331/composite
US : U.S.: NYSE
$ 79.22
-2.98 -3.63%
Volume: 77,976
July 9, 2020 10:46a
P/E Ratio
10.64
Dividend Yield
N/A
Market Cap
$3.09 billion
Rev. per Employee
$4.61M
loading...
/zigman2/quotes/206220859/composite
US : U.S.: NYSE
$ 29.36
-1.53 -4.95%
Volume: 299,773
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P/E Ratio
9.26
Dividend Yield
1.21%
Market Cap
$2.79 billion
Rev. per Employee
$2.37M
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/zigman2/quotes/201912487/composite
US : U.S.: NYSE
$ 32.70
-1.00 -2.97%
Volume: 555,535
July 9, 2020 10:46a
P/E Ratio
9.77
Dividend Yield
1.32%
Market Cap
$4.25 billion
Rev. per Employee
$1.50M
loading...
/zigman2/quotes/203145113/composite
US : U.S.: NYSE
$ 36.64
-1.82 -4.73%
Volume: 32,100
July 9, 2020 10:46a
P/E Ratio
10.27
Dividend Yield
3.54%
Market Cap
$2.43 billion
Rev. per Employee
$1.91M
loading...
/zigman2/quotes/202536373/composite
US : U.S.: NYSE
$ 64.01
-1.41 -2.16%
Volume: 759,341
July 9, 2020 10:46a
P/E Ratio
9.75
Dividend Yield
0.77%
Market Cap
$19.86 billion
Rev. per Employee
$1.77M
loading...
/zigman2/quotes/201694804/composite
US : U.S.: NYSE
$ 34.15
-1.12 -3.18%
Volume: 467,775
July 9, 2020 10:46a
P/E Ratio
9.03
Dividend Yield
1.39%
Market Cap
$9.46 billion
Rev. per Employee
$1.98M
loading...
/zigman2/quotes/202032328/composite
US : U.S.: NYSE
$ 58.17
-0.68 -1.16%
Volume: 1.06M
July 9, 2020 10:46a
P/E Ratio
11.52
Dividend Yield
1.20%
Market Cap
$21.39 billion
Rev. per Employee
$1.93M
loading...
/zigman2/quotes/202461766/composite
US : U.S.: Nasdaq
$ 100.09
-2.64 -2.57%
Volume: 52,486
July 9, 2020 10:46a
P/E Ratio
12.79
Dividend Yield
N/A
Market Cap
$2.58 billion
Rev. per Employee
$1.76M
loading...
/zigman2/quotes/206244792/composite
US : U.S.: Nasdaq
$ 185.78
-3.40 -1.80%
Volume: 3,292
July 9, 2020 10:35a
P/E Ratio
22.86
Dividend Yield
N/A
Market Cap
$1.74 billion
Rev. per Employee
$214,258
loading...
/zigman2/quotes/209548385/composite
US : U.S.: NYSE
$ 3,270.31
-61.11 -1.83%
Volume: 1,749
July 9, 2020 10:45a
P/E Ratio
15.09
Dividend Yield
N/A
Market Cap
$12.26 billion
Rev. per Employee
$1.26M
loading...
/zigman2/quotes/204302452/composite
US : U.S.: NYSE
$ 14.85
-0.63 -4.07%
Volume: 234,732
July 9, 2020 10:46a
P/E Ratio
8.76
Dividend Yield
N/A
Market Cap
$2.02 billion
Rev. per Employee
$2.27M
loading...
/zigman2/quotes/208081807/composite
US : U.S.: NYSE
$ 248.93
-0.24 -0.10%
Volume: 542,064
July 9, 2020 10:46a
P/E Ratio
24.83
Dividend Yield
2.40%
Market Cap
$267.99 billion
Rev. per Employee
$261,993
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/zigman2/quotes/205563664/composite
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$ 135.15
-0.60 -0.45%
Volume: 582,353
July 9, 2020 10:46a
P/E Ratio
22.95
Dividend Yield
1.62%
Market Cap
$102.49 billion
Rev. per Employee
$230,029
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/zigman2/quotes/202536373/composite
US : U.S.: NYSE
$ 64.01
-1.41 -2.16%
Volume: 759,341
July 9, 2020 10:46a
P/E Ratio
9.75
Dividend Yield
0.77%
Market Cap
$19.86 billion
Rev. per Employee
$1.77M
loading...
/zigman2/quotes/202536373/composite
US : U.S.: NYSE
$ 64.01
-1.41 -2.16%
Volume: 759,341
July 9, 2020 10:46a
P/E Ratio
9.75
Dividend Yield
0.77%
Market Cap
$19.86 billion
Rev. per Employee
$1.77M
loading...
/zigman2/quotes/202461766/composite
US : U.S.: Nasdaq
$ 100.09
-2.64 -2.57%
Volume: 52,486
July 9, 2020 10:46a
P/E Ratio
12.79
Dividend Yield
N/A
Market Cap
$2.58 billion
Rev. per Employee
$1.76M
loading...
/zigman2/quotes/202032328/composite
US : U.S.: NYSE
$ 58.17
-0.68 -1.16%
Volume: 1.06M
July 9, 2020 10:46a
P/E Ratio
11.52
Dividend Yield
1.20%
Market Cap
$21.39 billion
Rev. per Employee
$1.93M
loading...
/zigman2/quotes/206244792/composite
US : U.S.: Nasdaq
$ 185.78
-3.40 -1.80%
Volume: 3,292
July 9, 2020 10:35a
P/E Ratio
22.86
Dividend Yield
N/A
Market Cap
$1.74 billion
Rev. per Employee
$214,258
loading...
/zigman2/quotes/204302452/composite
US : U.S.: NYSE
$ 14.85
-0.63 -4.07%
Volume: 234,732
July 9, 2020 10:46a
P/E Ratio
8.76
Dividend Yield
N/A
Market Cap
$2.02 billion
Rev. per Employee
$2.27M
loading...
/zigman2/quotes/203145113/composite
US : U.S.: NYSE
$ 36.64
-1.82 -4.73%
Volume: 32,100
July 9, 2020 10:46a
P/E Ratio
10.27
Dividend Yield
3.54%
Market Cap
$2.43 billion
Rev. per Employee
$1.91M
loading...
/zigman2/quotes/209069331/composite
US : U.S.: NYSE
$ 79.22
-2.98 -3.63%
Volume: 77,976
July 9, 2020 10:46a
P/E Ratio
10.64
Dividend Yield
N/A
Market Cap
$3.09 billion
Rev. per Employee
$4.61M
loading...
/zigman2/quotes/201912487/composite
US : U.S.: NYSE
$ 32.70
-1.00 -2.97%
Volume: 555,535
July 9, 2020 10:46a
P/E Ratio
9.77
Dividend Yield
1.32%
Market Cap
$4.25 billion
Rev. per Employee
$1.50M
loading...
/zigman2/quotes/201694804/composite
US : U.S.: NYSE
$ 34.15
-1.12 -3.18%
Volume: 467,775
July 9, 2020 10:46a
P/E Ratio
9.03
Dividend Yield
1.39%
Market Cap
$9.46 billion
Rev. per Employee
$1.98M
loading...
/zigman2/quotes/206220859/composite
US : U.S.: NYSE
$ 29.36
-1.53 -4.95%
Volume: 299,773
July 9, 2020 10:46a
P/E Ratio
9.26
Dividend Yield
1.21%
Market Cap
$2.79 billion
Rev. per Employee
$2.37M
loading...
/zigman2/quotes/209548385/composite
US : U.S.: NYSE
$ 3,270.31
-61.11 -1.83%
Volume: 1,749
July 9, 2020 10:45a
P/E Ratio
15.09
Dividend Yield
N/A
Market Cap
$12.26 billion
Rev. per Employee
$1.26M
loading...
/zigman2/quotes/200736509/composite
US : U.S.: NYSE
$ 32.44
-1.58 -4.64%
Volume: 14,331
July 9, 2020 10:46a
P/E Ratio
6.65
Dividend Yield
N/A
Market Cap
$970.36 million
Rev. per Employee
$1.68M
loading...

Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

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