The homebuilders are subject to different data releases that impact the trading of those stocks. There are permits, starts, sales of new, sales of existing and of course there is also the myriad of data in each earning announcement. The point is, the homebuilders have a constant flow of information.
One data point that is not listed above but it is critical to the health of all the homebuilders. It is a key to buyers of new homes and existing ones so this should be something investors look to as well.
I am speaking to interest rates and how they impact the home buying decision.
Why Interest Rates Matter to Homebuilders
The Federal Reserve increased interest rates in December and at that meeting suggested that in 2016 we would see another four rate hikes. The probability of four-25 basis points probably accelerated a few housing searches from buyers that were aware of the Fed’s plan. Not all buyers pay attention to these things, but this was mid-winter and home sales have a way of slumping in the cold weather.
Savvy investors will look at the CME Fed Watch Tool to get a handle on how investors believe the next hike is coming. The April meeting of the Fed, at the time of this article being published was tracking at 14% (up from 7% just two days ago). The Tool correctly predicted the outcome of the March meeting as it had a 0% chance.
The Fed move from four probable hikes down to two acts as almost a stimulus to the group. It gives buyers that were on the fence last year one more shot and the new buyers get a little more runway to build up that down payment.
Two Direct Homebuilder Beneficiaries
There are two homebuilders that I need to call out as they have a Zacks Rank #2 (Buy). PulteGroup, Inc. (PHM) and Hovnanian Enterprises, Inc. (HOV) both carry that strong rank and also have great valuation metrics.
PHM trades at 11x forward earnings compared to to a 12x industry average. The price to book multiple for PHM is 1.3x while the industry average is 1.6x. Analysts have projected revenue growth of 19% for PHM in 2016, while the industry average is 12%. They also are calling for EPS growth of 21% compared to 11% for the industry average.
HOV trades at 6.4x forward earnings as compared to a 12x industry average. In fiscal 2016 (OCT year-end) analysts are projecting revenue growth of 35% and EPS growth of 322%, and that compares very favorably to the industry averages of 12% and 11% respectively.
Another homebuilder with a Zacks Rank #2 (Buy) is NVR, Inc (NVR). I have found that telling investors to buy a stock priced at $1700 is somewhat difficult as many investors haven’t gotten past the idea of buying an “odd lot” means nothing to your total return. Investing is more about the percentage gain your investment yields as opposed to the price of the stock or the number of shares. NVR trades at 15x forward earnings, which is slightly higher than the industry average.
Indirect Real Estate Plays
I have been a fan of Zillow Group Inc (ZG) since long before they went public. A stellar management team and top notch product are criteria that all investors should look for, and they will find it here. The stock is currently a Zacks Rank #3 (Hold) but was recently upgraded by a major brokerage to Outperform.
I list ZG as an indirect play because the home buyers are home shoppers before the decision is made. ZG plays a crucial role in that process and benefits from advertisers trying to get in front of new home buyers.
Keeping in line with what the customer wants in this extension of lower interest rates is Realogy Holdings Corp (RLGY) which is also a Zacks Rank #3 (Hold). The company provides real estate brokerage services via subsidiaries like Coldwell Banker and Century 21 among others.
RLGY has a Zacks Value Style Score of “A” which means that value investors will be finding this stock coming up on a lot of their screens. Growth focused investors probably won’t as it has a Style Score of “C” for that metric.
Homebuilder Stocks to Buy
There are plenty of data points to keep investors on their toes when looking at the real estate market. The home builders are mostly Zacks Rank #3 (Hold) right now, but there are a few exceptions. Investors should also look to the services or “supply chain” of industries they want to focus on.
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