Homebuilder sentiment ticked up recently as buyers’ demand overshadowed headwinds. A growing economy and record low unemployment rate boosted housing demand. At the same time, the cost of lumber is falling, which is enhancing builders’ confidence.
The broader construction industry is also hiring on a large scale, reflecting the housing market’s underlying strength. All of these tailwinds have helped boost the longer-term prospects of several homebuilder stocks.
With that said, here are five of the best stocks to buy thanks to this recent bullishness … but before we reach our list, let’s first examine how homebuilder stocks got here in the first place:
U.S. Homebuilder Sentiment Rises
Builder confidence unexpectedly rose in October after a gain was recorded for the first time in five months. Per the National Association of Home Builders/Wells Fargo (“NAHB”), the monthly confidence index went up one point to 68 in October. Any reading above 50 shows improvement.
The index’s three sub-gauges, current sales condition ticked up one point to 74 and expectations for sales over the next six months rose one point to 75. The gauge of buyer traffic witnessed the largest gain, up four points to 53.
Why Builders Are Feeling Better?
Builders are motivated by solid housing demand, fueled by a growing economy and one of the strongest job markets in decades. Currently the components of the Conference Board’s Leading Economic Index indicate a 3% or more growth rate in GDP in the final two quarters of the year.
Notably, the economy, has already expanded at a seasonally adjusted rate of 4.2% in the April-June quarter, per the Commerce Department. This marked the strongest rise since the 4.3% annual gain recorded in the third quarter of 2014. The U.S. unemployment rate, in the meantime, fell to a 49-year low of 3.7% in September, the lowest since December 1969, per the Labor Department (read more: American Labor Market Hale and Hearty: Top 5 Winners).
Housing demand, in fact, is expected to improve further in the near term. After all, summertime underperformance due to concerns of a housing slowdown may now lead to a “hope trade”, where investors will buy housing-related stocks in winter and early spring in anticipation of a bounce back in demand. Raymond James analyst Buck Horne added that on average, this phenomenon helped homebuilders outdo the broader S&P 500 by 14% in the last 33 years.
Builders are also relieved to see that lumber prices recently have tanked nearly 50% since reaching a record in May. Robert Dietz, NAHB’s chief economist added that lumber prices continue to decline because supplies are rising, which has already increased 5% in the first four months of this year.
Thus, these tailwinds are a blessing in disguise for homebuilders among rising home prices and borrowing costs.
Construction Hiring Is Booming
Another sign that the market for newly built homes may be regaining steam is that a lot of hiring is taking place in the broader construction industry. This is a telltale sign that the housing market is in an expansion mode and definitely in good shape.
Per the Labor Department, employers have added 23,000 new construction jobs in September, while the industry has added 315,000 jobs over the past 12 months.
Even pay and perks are also quite encouraging. Last month, average hourly earnings for construction workers were $30.18, more than $27.24 earned by all workers. Ken Simonson, the chief economist for the Associated General Contractors of America, a trade group reiterated that “the construction industry added workers and increased pay in the past year at rates higher than the overall economy.”
Top Homebuilder Stocks to Buy
Given the aforementioned positives, investing in housing-related stocks that can make the most of the improved homebuilder sentiment seems judicious. We have, thus, selected five such stocks to buy that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Toll Brothers (NYSE:TOL) designs, builds, markets and arranges finance for detached and attached homes in luxury residential communities in the United States. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has been raised 1.8% in the past 60 days. The company’s expected earnings growth rates for the current quarter and current year are a solid 57.3% and 44.2%, respectively.
Fastenal Company’s (NASDAQ:FAST) products such as bolts, nuts, screws, studs and related washers are used in manufactured products and building projects. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has been revised 0.8% upward in the past 60 days. The company’s expected earnings growth rates for the current quarter and current year are 33.3% and 33.2%, respectively.
American Woodmark Corporation (NASDAQ:AMWD) manufactures and distributes kitchen, bath and home organization products for the remodeling and new home construction markets in the United States. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has been raised 1.1% in the past 60 days. The company’s expected earnings growth rates for the current quarter and current year are an encouraging 58.5% and 45.4%, respectively. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Haverty Furniture Companies (NYSE:HVT) is a full-service home furnishings retailer in the Southern and Midwestern regions in the United States. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has risen 0.7% in the past 60 days. The company’s expected earnings growth rates for the current quarter and current year are a promising 32.1% and 11.2%, respectively.
Restoration Hardware Holdings (NYSE:RH) operates as a retailer in the home furnishings. It offers products in various categories, including furniture and lighting. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has been revised 14.7% up in the past 60 days. The company’s expected earnings growth rates for the current quarter and current year are a solid 21.2% and 150.7%, respectively.
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