Housing stocks performed spectacularly last year, rising 45% compared to the S&P 500’s return of just 27%. The extraordinary performance was driven by robust demand for larger homes, tighter inventories, and low mortgage rates. Hence, with such an incredible performance last year, it will be interesting to see what 2022 holds for the sector.
Though the chances of outsized returns are slim, you’d expect the sector to continue delivering for investors. The Covid-19 pandemic is far from over yet, as new variants keep popping up. Hence, the remote working trend is likely to fuel demand for larger homes. Moreover, with the Federal Reserve’s hawkish policy, mortgage rates are likely to trend higher for the foreseeable future.
Nevertheless, you need to be careful in investing in housing stocks with a short-term horizon during these volatile times. Let’s look at three of the most auspicious housing stocks trading in the market:
Housing Stocks To Buy: NVR (NVR)
NVR is one of the top-performing housing stocks with a tremendous track record of improving returns on equity. Moreover, its asset-light business model has essentially shielded it from many of the risks faced by its peers. Hence, its return on equity in the past five years has averaged at a whopping 40%.
The company has a phenomenal track record of growing its revenues and earnings over the past several years. Moreover, its margins are sublime, as it outsources its construction to contractors and avoids land development. Its operating performance is firmly in the green, boasting years of free cash flow growth of over 50% on a year-over-year basis. Over the past several years, it has been a cash-flow generating machine with a monstrous cash balance of $2.57 billion. Hence, NVR stock is perhaps the safest housing play at this time.
LGI Homes (LGIH)
LGI Homes is one of the largest homebuilders in the United States, primarily focusing on entry-level homes. The company has been a hit with a younger demographic, focusing on minimizing ownership costs. Moreover, it operates on a massive scale, enabling it to compete effectively on price.
LGI Homes has been a remarkable performer in 2021 and expects to replicate the same success this year. Its year-over-year revenues have grown over 51%, almost 20% higher than its 5-year average. Moreover, its EBITDA (earnings before interest, taxation, depreciation and amortization) growth stands at an astonishing 101% for the past year.
However, its financial flexibility is under question with its poor cash to debt ratio. The decline in its cash till is mainly attributable to the issuance of senior notes and repayment of its credit facility. However, with cash and equivalents of roughly $2.6 billion, the company debt is manageable. Additionally, LGIH stock trades at lower than one times forward sales, further cementing its bull case.
D.R. Horton (DHI)
D.R. Horton is one of the most reputable names in the U.S. house building sector. It has been consistently delivered for its shareholders since its inception, and the past couple of years have been no different. Despite its outperformance, DHI stock trades at highly attractive multiples.
2021 was a dazzling year for the company, with its net income growing 76% to $4.2 billion. Moreover, its return on equity was at a whopping 31.6%. Additionally, revenue growth came in at 37% for the year, comfortably ahead of its 5-year average of roughly 17%.
With its efficient management, robust business model, and multiple growth tailwinds in the sector, expect DHI stock to continue growing at a healthy pace. It is perhaps the safest bet in the burgeoning housing sector at this time.
On the date of publication, Muslim Farooque did not have (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.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.