Over the last 10 years, the home-building industry has seen both extremes. Following the 2007-09 financial crisis, the industry came to a near standstill as markets had become overbuilt. However, after years of ultra-low interest rates, the industry moved to the other extreme with demand moving higher.
Suddenly, the most significant challenges to growth for home builder stocks became filling construction jobs and finding land on which to build. Demand has grown strongest among millennials, who now command the income to afford houses. The market is most active in large metros, mostly located in the Sun Belt, who see the largest growth in population.
Still, the specter of rising interest rates has hurt these stocks in recent months. As a result, most stocks in this sector have fallen year to date. With low price-to-earnings (PE) ratios and profit growth expected to remain in the double digits, the drop in stock prices may have created bargains.
These five home builder stocks should give investors an opportunity to buy into this high-growth sector at low valuations.
Home Builder Stock 1: Century Communities Inc (CCS)
Century Communities Inc (NYSE:CCS) builds homes in high-growth markets in the South, the Southwest and the West Coast. The Greenwood Village, Colorado-based home builder specializes in single-family homes as well as townhouses and condos. Founded in 2002, the company operates under the name Grand View Builders and three other names.
Most of its revenue has come from its builds in Colorado and Texas. However, it has acquired home builders in both Las Vegas and Georgia in its bid to extend its reach.
Among home builder stocks, CCS has also enjoyed astounding levels of growth. Over the last five years, revenue growth has averaged over 70%. Profits have increased by over 52% per year on average. Despite this growth, the stock has struggled this year, likely because of the fear of rising interest rates.
However, this fear has created a lucrative opportunity for new buyers. CCS stock trades at under 8.5 times forward earnings. Although earnings growth will come down from the rates seen in the past, analysts expect it to remain well in the double digits for the immediate future. With a market cap close to $925 million, its size remains well below the most significant players in the industry.
Home Builder Stock 2: Lennar Corporation (LEN)
Lennar Corporation (NYSE:LEN) recently became the largest home builder stock. Previously the second-largest home builder, LEN bought the fifth-largest home builder, CalAltlantic Group, Inc. This made the company larger than the long-time market leader, D.R. Horton Inc (NYSE:DHI).
Founded in 1954, the Miami-based home builder operates in 21 states spread across most regions of the country. Unlike other home-building stocks, Lennar markets homes under its company name only. It also operates segments involved in mortgage financing, multifamily construction, asset management, and construction of master-planned communities.
Despite its $17.75-billion market cap, LEN stock offers opportunity. LEN trades at just under 11 times forward earnings.
It has also increased revenues by an average of over 25% per year over the last five years. This does not count the boost of over 50% that company revenues will see with the CalAtlantic merger. Although earnings fell modestly in 2017, LEN has still enjoyed double-digit earnings growth for most of the last five years.
The company expects to resume double-digit profit growth this year. As a large home builder that moves to grow even larger, its low multiple make LEN stock an attractive buy despite its larger size.
Home Builder Stock 3: Taylor Morrison Home Corp (TMHC)
Taylor Morrison Home Corp (NYSE:TMHC) builds homes across high-growth markets, mostly in the South and the Southwest. Among home builder stocks, the Scottsdale, Arizona-based company specializes in single-family homes for the starter, luxury and adult-active markets.
The company has grown along with its markets. Revenues have risen by an average of over 30% per year over the last five years. Earnings have fallen for much of this time. Still, the company consistently beats earnings, and net income has now hit an uptrend. Analysts believe earnings growth will now stay in the double digits for the next two years.
Ever since, hitting a low in early 2016, the stock has begun to rise. Today, it has roughly doubled from that 2016 low. Despite trading at higher levels, TMHC stock trades at a forward multiple of about 8.75. With a five-year average PE of over 13, the stock trades at a substantial discount from its normal valuation.
Also, despite becoming the sixth-largest home builder in the U.S. based on closings, its size remains small. TMHC stock holds a market cap of about $2.5 billion, well below market leader Lennar’s $17.75-billion size.
Home Builder Stock 4: TRI Pointe Group Inc (TPH)
TRI Pointe Group Inc (NYSE:TPH) specializes in single-family homes and condos. Founded in 2009, the company has already reached the top 15 in terms of closings. The Irvine, California-based company operates primarily in California and surrounding states. It has also begun expanding into other parts of the country such as Texas and Virginia.
TPH has seen average yearly revenue growth at over 21% over the past five years. Though the company has seen uneven earnings growth, analysts predict its earnings will grow in the double digits over the next two years before leveling off.
Like with many home builder stocks, the equity struggled following its 2013 IPO. Still, TPH stock has seen a growth trend since 2016. It now trades at about double the early 2016 low. Despite this increase, this year’s expected earnings figure places the forward multiple at about 9.75.
TPH also has beaten earnings in the last four quarters, indicating the PE could move even lower. A simple move back to its average PE would position the stock to more than double from current levels.
Home Builder Stock 5: William Lyon Homes (WLH)
William Lyon Homes (NYSE:WLH) builds mostly in the Western states. They construct homes for both entry-level buyers and those wanting large, luxury houses.
Based in Newport Beach, California, they’ve historically focused on the West Coast, as well as Arizona and Nevada. Now that it completed its purchase of RSI Communities, the company also has expanded into Texas. This places WLH in most of the highest-growth home markets west of the Mississippi.
Despite its 60+ years in business, William Lyon did not join the list of home builder stocks until its IPO in 2013. Still, the stock may finally be poised to enjoy some of its highest growth. In its latest quarter, it also grew its earnings by over 145% on a year-over-year basis. It has also seen revenue rise by an average of almost 37% per year over the last five years.
Even with the high growth, the stock trades at a point that should attract new buyers. WLH stock trades at a forward PE of just over 8. The market cap of the company still stands at under $1 billion, leaving ample room for this small-cap stock to grow. With earnings expected to grow at double digits for the foreseeable future, investors should keep an eye on WLH.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.