During the initial months of the pandemic and through the beginning of 2021, demand for homes surged due to people eager to move out of urban areas and into suburban and rural areas — and due to low mortgage rates. Homebuilder stocks looked like no-brainers. Following this initial wave, there were doubts that the housing market’s price appreciation would continue, as some anticipated an increase in inventories.
Though its momentum has cooled from these heady days, there’s no doubt that the fundamentals for the homebuilding industry continue to remain strong, and recent economic data has proven the doubters wrong. The latest new home construction figures for November came in at an 11.8% increase from last year and topped expectations. Similarly, the homebuilders’ confidence index has been above 80 for most of the year. Notably, this is a higher reading than the 90s or early 00s.
These data points increase confidence that the housing bull market is in its early to middle innings rather than close to a terminal stage. Therefore, investors should consider buying high-quality homebuilder stocks. My picks are:
Homebuilder Stocks: Cavco (CVCO)
CVCO designs and produces factory-built homes and also operates in the financial services segments. The Phoenix, Ariz.-based company’s offerings include wholesale and retail factory-built housing operations, while its financial services segment includes manufactured housing consumer finance and insurance.
The company’s recent earnings report was quite strong, as its net revenue for the fiscal second quarter increased 39.3% to $359.54 million. Net income increased 150% year-over-year to $37.61 million. In addition, its EPS came in at $4.06, a 150.6% increase.
For its fiscal year 2022, CVCO’s EPS is expected to increase 73.8% to $14.34. Next quarter’s revenue is expected to increase 42% to $435.30 million. It has topped earnings per share expectations in each of the trailing four quarters. In terms of valuation, CVCO is cheaper than the S&P 500 with a forward P/E of 19 vs 28. This is despite having faster revenue growth and bigger margins.
CVCO’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to a “buy” in our proprietary rating system. B-rated stocks have posted an average annual performance of 19.7% which compares favorably to the S&P 500’s annual average gain of 7.1%.
In terms of component grades, it has an A for Sentiment and a B for Growth and Momentum. Click here to see CVCO’s complete POWR Ratings including how it stacks up against its peers.
Skyline Corporation (SKY)
SKY is a factory-built housing company that operates through roughly 38 manufacturing facilities across the United States and Western Canada. The company offers manufactured and modular homes, park-models and modular buildings for the multi-family, hospitality, senior and workforce housing sectors. It operates under the well-known brand names Skyline Homes, Athens Park Model RVs, Dutch Housing, Shore Park and Silvercrest.
In its last quarter, SKY reported 89 cents per share in earnings topping analysts’ expectations of 68 cents per share. It was also a 20% increase from last quarter’s 75 cents per share in earnings. Revenue also beat at $524 million vs expectations of $518 million.
Next quarter, analysts are forecasting 74 cents in earnings per share and revenue of $499 million. These would be about a 95% increase in earnings and a 32% increase in revenue. Notably, SKY has topped analysts’ estimates in four of the last five quarters.
Overall, these strong fundamentals are consistent with the POWR Ratings, as SKY has an overall B rating, which equates to a “buy” in our proprietary rating system. The POWR Ratings are calculated by evaluating 118 different factors, each with its own weight.
It also provides component grades to give investors even more perspective. Not surprisingly, SKY stands out in multiple categories including a B for Momentum and Quality. Click here if you want to see SKY’s complete POWR Ratings including how it does for Value and Sentiment.
Homebuilder Stocks: Toll Brothers (TOL)
The last of the three homebuilder stocks, TOL designs, builds, markets, and arranges financing for a variety of detached and attached houses in luxury residential communities around the United States. The company operates through two segments: Traditional Home Building and Urban Infill. In addition, TOL builds, owns, and manages golf courses and country clubs; develops and sells property; and provides home automation and technology choices to homeowners.
Toll Brothers specializes in single-family homes and condominiums in luxury communities and was a beneficiary of increased demand for suburban real estate during the pandemic. Since then, it’s maintained growth but struggled with some issues like labor shortages, soaring lumber prices and other supply chain issues.
Despite these challenges, margins have expanded, indicating that buyers are absorbing higher prices.
Another positive is its backlog of orders.
Shares hit all-time highs before a 9% pullback over the last week along with the selloff in the broad market. Toll Brothers is in a similar situation to many other homebuilders and cyclical stocks, where we see very low multiples. One interpretation is that the market expects earnings to decline and have peaked. Therefore, the bull case on these stocks and Toll Brothers rests on the companies exceeding in terms of earnings and guidance.
So far this does seem to be coming to fruition as Toll Brothers reported $3.02 per share in earnings, a 97% increase from last year and a 20% increase in revenue to $3.1 billion in its last earnings report. Analysts were looking for $2.48 per share in earnings and $2.9 billion in revenue. In total, the company delivered 3,341 homes, a 14% increase from last year.
In Q1, the company expects to deliver 2,000 units with an average price per home of $875,000. For the next fiscal year, Toll Brothers is projecting 20% revenue growth. TOL’s strong fundamentals are also reflected in its POWR ratings with its overall B rating which equates to a Buy. Click here to see TOL’s complete POWR Ratings.
On the date of publication, Jaimini Desai did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Jaimini Desai has been a financial writer and reporter for nearly a decade. He has helped countless investors take profitable rides on some of the hottest growth trends. His previous experience includes writing for Investopedia, Seeking Alpha, and MT Newswires. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters.