6 Homebuilder Stocks to Avoid While the Real Estate Market Runs Hot

homebuilders - 6 Homebuilder Stocks to Avoid While the Real Estate Market Runs Hot

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I’m not breaking and news by saying that the U.S. real estate market is on fire. This has helped place many homebuilders in the spotlight as investments to consider.

As Jim Anhut, director of MSU’s real estate investment management minor at the Broad College of Business, wrote in an email to InvestorPlace, “increasing demand for single family homes encourage new development, yielding higher prices for land, construction labor and raw materials such as lumber. Limited supply of existing inventory, especially in single family residential today, drives up the prices of the existing inventory. Higher prices for the existing or new home will eventually dull demand and prices will stabilize. When demand slows, construction will slow and the cost of materials and labor will either stabilize or fall.”

But one thing you want to understand is, it’s not just individuals and families that are buying houses these days. There are hedge funds, alternative investment funds and investors from overseas converting their home currency into U.S. investments.

What’s more, electrical supplies and equipment that are made in China have been hard to get since the embargo went into effect a couple years ago. And during the pandemic, lumber companies shut down and the demand for lumber has forced the prices to soar.

This has been tough for developers and contractors, especially those with jobs underway. They’ve been hit with price increases for materials as well as significant delays. Even if you have deals done, you can’t move on until you satisfy your investors — and financers.

What does that mean for the sector right now? Anhut wrote, “Some market prognosticators see a bubble that is about to burst due to this upward spiral of prices and construction costs resulting in a deflation of prices for publicly traded residential builders and REITS. I see this moment in the cycle as more of a mylar balloon that is somewhat impervious to a single squeeze, but more likely to deflate slowly over time.” 

And these homebuilders aren’t the ones you want to ride out this crazy time:

  • Landsea Homes (NASDAQ:LSEA)
  • Frontdoor (NASDAQ:FTDR)
  • Taylor Morrison Homes (NYSE:TMHC)
  • Cavco Industries (NASDAQ:CVCO)
  • Legacy Housing (NASDAQ:LEGH)
  • Patrick Industries (NASDAQ:PATK)

Homebuilder Stocks to Avoid: Landsea Homes (LSEA)

Residential neighborhood subdivision skyline Aerial shot

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It may seem like boutique homebuilders would be a great way to play this housing boom. And that would make LSEA a perfect choice.

However, smaller builders have a tougher time getting materials since they don’t carry the heft and volume of bigger builders. That means a company with a market cap of just $384 million is having to scramble to find lumber and parts, as well as work crews.

In theory, LSEA should be in a great spot, building master-planned communities in the top U.S. cities. But buying that real estate also costs a lot money, so growth is limited in that direction. Development has slowed. And many people are moving out of the cities where they’re building these exclusive communities with the advent of work from home.

LSEA is down 22% year-to-date. It gets an F rating in my Portfolio Grader.

Frontdoor (FTDR)

Man in suit with hands over paper cutouts of family, car and home. Represents insurance.

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You may not have heard of Frontdoor but it’s likely you’ve seen plenty of commercials for American Home Shield. That’s one of the home service brands that FTDR owns. It also owns the brands, HSA, OneGuard and Landmark. They insure the bigger ticket items in houses, to defray the costs of equipment repairs or replacements.

It’s technically the only stock here that isn’t a homebuilder, but its services are directly linked with the homebuilders.

The trouble is, many new homes come with coverages on appliances, etc. And the barriers to entry in this market aren’t significant, so there are competitors as well.

What’s more, as long as demand outstrips supply its growth is limited. And all the investor money (as opposed to individual buyers) in houses, means they’re not buying these policies.

FTDR is also expensive, yet it’s down 2% year-to-date. It gets a D rating in my Portfolio Grader.

Homebuilder Stocks to Avoid: Taylor Morrison Homes (TMHC)

the taylor morrison logo displayed on a web browser and magnified by a magnifying glass

Source: Shutterstock

There are a lot of small to mid-sized homebuilders out there, and TMHC is one of them. It has a $3 billion market cap, and has properties across the West, Southwest and Sun Belt. And its homes are in the mid-priced range, which puts them in a good spot for investors to buy in during these low rates.

The thing is there isn’t anything particularly unique about its business or its communities. Even TMHC’s website lacks an About Us section where most homebuilders look to differentiate themselves from the pack.

The best thing you can say is it’s reasonably priced here, but it’s not garnering much attention. TMHC stock is down 3% year-to-date. It gets a D rating in my Portfolio Grader.

Cavco Industries (CVCO)

picture of a forest with mountains in the distance

Source: shutterstock

Launched in 1965, CVCO specializes in modular homes. It also builds cabins for parks. The latter business has potential, but it won’t be booming until the new wave of covid-19 wanes and there’s more interest in outdoor tourism in local, state and national parks.

CVCO has a long history in the entry-level homebuilders sector and it also has a nationwide sales and distribution network as well as a financing arm. But this isn’t the sector that investors are buying into right now.

The stock is up 22% year-to-date, which is a solid return. But it doesn’t have much more headroom here. CVCO gets a D rating in my Portfolio Grader.

Homebuilder Stocks to Avoid: Legacy Housing (LEGH)

cardboard miniature house on table back-lit by sunlight through a window

Source: Shutterstock

This is another manufactured/modular home company that joined the market in 2005. As a Texas-based company, it specializes in entry level manufactured homes as well as tiny houses and oilfield housing.

Again, there’s certainly a need for this housing and there’s demand. But this isn’t the kind of housing where a company can expect to expand its margins. It’s more about growing volume, since the housing is somewhat commoditized, and the locations aren’t prime real estate.

LEGH is up 8% year-to-date and has a $400 million market cap. It’s not a bad stock but it isn’t where the big growth in homebuilding is right now. LEGH is also exposed to the volatile oil markets, and the recent haircut in prices and choppy economy doesn’t bode well for expansion there. It gets a D rating in my Portfolio Grader.

Patrick Industries (PATK)

A photograph of the ocean.

Source: Manu Galdamez/ShutterStock.com

During the pandemic, one of the hottest sectors was stocks that could get people out, without getting them around other people. Recreational vehicles and boats were very popular among investors and vacationers.

But those days are in our rearview. PATK builds components and materials for the manufacture of RVs, marine and modular housing companies. It’s the company behind the manufactured housing companies.

Again, homebuilders in this sector aren’t the ones that will be experience the biggest benefits of the housing boom. And the RV and boating boom is a bit tired now too.

That doesn’t mean PATK is doomed, it simply means that there are better places for your money to grow.

PATK is up 14% year-to-date and is trading at a current price-to-earnings ratio of 14x. It also has a 1.4% dividend. It’s just losing momentum here. It gets a D rating in my Portfolio Grader.

On the date of publication, Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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