After significantly underperforming in 2013, housing stocks didn’t exactly impress investors in 2014, either. Major home builders including Lennar Corporation (LEN), D.R. Horton, Inc. (DHI), PulteGroup, Inc. (PHM) and Toll Brothers Inc (TOL) all took a beating across most of last year.
But while not a single one of these housings stocks had made investors money between Jan. 1 and Oct. 1 of last year — with Toll Brothers the worst dog of the group with -15% returns across those nine months to start 2014 — the sector has bounced back nicely since then.
While the S&P 500 is up only slightly since Oct. 1 with a gain of less than 2%, these home builders have all jumped significantly in the past three months. Check out these returns:
- Lennar stock, +17%
- DR Horton stock, +23%
- PulteGroup stock, +29%
- Toll Brothers stock, +13%
- SPDR S&P Homebuilders (ETF) (XHB), +20%
So what’s going on here? And more importantly … can investors expect these kind of returns to continue in 2015?
Housing Stocks Building a Strong 2015
First, it’s important to acknowledge that weak earnings could hold back the market in general. Low crude oil prices will take a lot of the air out of the energy sector, and the Wall Street Journal is predicting a rather disappointing showing across fourth-quarter earnings as a result.
Thus, it’s not like 2013 or 2014 where the disappointing performance of home builders is taking place amid the backdrop of a roaring stock market. The bar might be lower to get across considering the volatility and earnings pressure out there right now.
But don’t think that means housing stocks are simply the best of a bad lot. There are signs of growth here that should be encouraging.
For instance, mortgage applications just enjoyed their highest weekly jump since late 2008. According to the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending Jan. 9, a whopping 49.1% increase shows that Americans are still in a homebuying mood — even if the stock market is getting choppy.
And with rates actually moving lower instead of increasing, it’s not like the interest-rate environment is going to create a headwind anytime soon. While many are predicting the Federal Reserve to move on rates in the next year or two, lending is certainly brisk right now.
Furthermore, home prices are increasing at a slower rate … but still increasing, as of the December S&P/Case-Shiller report. That should also provide continued encouragement to homebuyers.
And, of course, the housing stocks themselves are looking good. Consider Pulte, which saw steep year-over-year earnings declines in 2014 and missed expectations badly a number of times. In 2015, the company is projecting year-over-year profit growth in every single quarter and the easier comps could certainly fuel a big profit surprise. On top of that, revenue is supposed to grow by double digits in fiscal 2015.
When you have companies with easier earnings comps, strength in their core industry and a lack of many better investment options … it all adds up to a pretty strong sector even amid a choppy investing environment.
I’d have confidence buying home builders in the near term based on these trends.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.