5 Housing Stocks to Buy Before the Housing Market Bounces Back

housing stocks - 5 Housing Stocks to Buy Before the Housing Market Bounces Back

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After briefly crashing in March on novel coronavirus fears, housing stocks have been on fire over the past three months. The SPDR S&P Homebuilders ETF (NYSEARCA:XHB) is up 70% over that stretch.

It’s easy for investors to look at that huge rally in housing stocks, next to a U.S. economy that is still partially shut down, and say now is the time to sell.

But that cursory analysis focuses on what’s happening today. Not what will happen tomorrow. And what will happen tomorrow in the housing market is nothing but good things. Simply consider:

  1. The economy is gradually reopening and recovering, because the world is now learning how to keep turning while managing Covid-19 risks. As the world gets better at this balancing act over the next few months, economic activity will continue to pick up. So will buying and selling activity in the housing market.
  2. Existing homes sales have plunged over the past few months. But people still need a place to live. Thus, this plunge in existing home sales has just created pent-up demand for home buying over the next few months.
  3. Mortgage rates are at all-time lows. Low rates mean cheaper financing. Cheaper financing attracts more homebuyers.
  4. Everyone is saving their paychecks today, providing ample ammunition for home buying firepower in the coming months.
  5. Millennials are finally moving out, and the U.S. homeownership rate is rising off multi-decade lows.

I think the market fundamentals strongly suggest that now is the time to buy housing stocks. It’s not the time to sell them.

With that in mind, the five best housing stocks to buy now are:

  • KB Homes (NYSE:KBH)
  • Lennar (NYSE:LEN)
  • D.R. Horton (NYSE:DHI)
  • Toll Brothers (NYSE:TOL)

Housing Stocks: KB Homes (KBH)

Housing Stocks: KBH

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One of the best housing stocks to buy now is KB Homes.

The bull thesis on KBH stock boils down to three things.

First, the company is focused on creating affordable, entry-level homes for first-time buyers. Because millennials are now moving en masse, this segment projects to be the hyper-growth vertical in a resurgent housing market over the next few quarters.

Second, KB Homes is also committed to making environmentally positive new homes with solar panels. That’s a big deal, since the company sells to a millennial, first-time buyer crowd that wants to purchase an environmentally conscious home. Nearly half of millennial homebuyers want both solar panels and energy storage in their home.

Third, KBH stock is undervalued. Fiscal 2021 earnings per share estimates were sitting around $4 prior to Covid-19 emerging. They have since plunged. But I think there’s a chance that, by the end of the year, fiscal 2021 EPS estimates rebound to $4, on the back of favorable housing market fundamentals.

If so, a historically average 10.5-times forward earnings multiple on $4 in 2021 earnings per share implies a 2020 price target for KBH stock of over $40.

LGI Homes (LGIH)

Housing Stocks: LGIH

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Another top-quality housing stock to buy now is LGI Homes.

Much like the bull thesis on KBH stock, the bull thesis on LGIH stock boils down to three things.

First, LGI Homes — like KB Homes — sells entry-level homes to first-time homebuyers, and will therefore benefit from favorable demographic trends over the next few years.

Second, LGI Homes has a strong geographic concentration in states with less strict Covid-19 restrictions and an underlying population that appears more ready to resume economic normalcy. Think states like Texas, Florida, Georgia and South Carolina. LGI Homes has a huge presence in all these states, and therefore, should see its growth trends improve both more quickly and more meaningfully than the broader U.S. housing market over the next few months.

Third, LGIH stock is undervalued. Given its geographic concentration, LGI Homes’ growth trends will rebound in a V-shaped fashion. This V-shaped recovery will prompt analysts to revise fiscal 2021 earnings per share estimates higher. They will likely raise them to near where they were prior to Covid-19 emerging — around $9.

A 10.5-times forward earnings multiple on that implies a 2020 price target for LGIH stock of nearly $95.

Lennar (LEN)

Housing Stocks: LEN

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The bull thesis on homebuilder Lennar is astoundingly simple. The national homebuilding giant gives investors exposure to the entire housing market recovery.

Lennar makes first-time, move-up and retirement homes. The company also sells across all price points, from entry-level to luxury homes. And it sells in almost any geography, from California to New Jersey.

In other words, investors should see LEN stock as a pure and broad exposure play on the housing market recovery.

Given the fundamentals laid out in the intro — rebounding economic activity, pent-up demand, low rates, huge savings and favorable demographic tailwinds — that housing market recovery looks promising over the next months.

Consequently, so does a sustained rebound in LEN stock.

D.R. Horton (DHI)

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America’s No. 1 homebuilder by volume since 2002, D.R. Horton also doubles as one of the best housing stocks to buy now.

That’s mostly because, much like Lennar, D.R. Horton offers investors broad exposure to the entire housing market recovery. The company builds homes in 89 markets across 29 states, and sells everything from $100,000 entry-level homes to seven-figure luxury homes.

Thus, regardless of which particular housing market vertical recovers over the next few months, so long as any part of the market recovers, D.R. Horton’s growth trends will recover, too. And DHI stock will rally.

Of note, D.R. Horton is the No. 1 homebuilder in today’s fastest-growing cities, many of which happen to be in states with very loose Covid-19 restrictions. Think Dallas. Houston. Phoenix. Or Austin. D.R. Horton is the top homebuilder in all of those metros, and Covid-19 restrictions in those cities have been quite lax. As such, a rebound in those hot housing markets will materialize quickly over the next few months, prompting an equally quick rebound in D.R. Horton’s growth trends.

Alongside all of that, D.R. Horton stock could fly above $60. It just needs consensus fiscal 2021 EPS estimates to rebound back to where they were before Covid-19 (around $5.50) and to sustain a historically average 11-times forward earnings multiple.

Toll Brothers (TOL)

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Last, but not least, on this list of housing stocks is the nation’s leading luxury homebuilder: Toll Brothers.

Yes, I understand that the luxury home market may take longer to recover than the entry-level market. That’s mostly because in the luxury market, things like low interest rates and high savings rates are less of a tailwind than they are in the entry-level market.

Still, the luxury housing market does coincide with broader economic activity. Broader economic activity will improve over the next few months. So will buying activity in the luxury housing market.

But, the real reason to buy TOL stock here is the once-in-a-lifetime opportunity that comes with baby boomers downsizing.

More than a third of today’s homeowners are over the age of 50. Those boomers are ready to downsize. This downsizing dynamic will be accelerated by new millennial homebuyers entering the market and providing demand.

Toll Brothers has recently built out a segment called Active Adult which is focused on creating luxurious, low-maintenance living accommodations for the 55-and-over crowd. In other words, the ideal downsizing destination for middle-to-upper income boomers.

Thanks to this demographic tailwind, the future of Toll Brothers is bright — and TOL stock is undervalued relative to that bright future.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities. 

Article printed from InvestorPlace Media, https://investorplace.com/2020/06/5-housing-stocks-buy-housing-market-recovery/.

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