Barron’s recently suggested that the malaise in homebuilder stocks that’s been ongoing since March looks ready to end. That suggests investors might want to consider homebuilder stocks to buy to ride their upward correction.
Arguments for buying homebuilder stocks include the fact that despite more homes for sale in the U.S. — 1.52 million single family homes, new and existing, were for sale in April — that is still well below the historical average of 2.36 million.
The article points out that UBS analysts believe homebuilder stocks deserve a higher valuation. Some of the largest are trading at 9-10 times the forward earnings estimate.
“More broadly, it argues that the home-builder group has undergone a ‘vast transformation’ for the better since the global financial crisis, and deserves a higher valuation,” stated Barron’s contributor Jack Hough.
With the U.S. housing shortage at 2.2 million units needing to be built, the strongest homebuilders will continue growing their businesses. That should continue to fuel a rebound into the fall and beyond.
Here are my three to buy in June.
PulteGroup (PHM)
PulteGroup (NYSE:PHM) is the largest of the three homebuilder stocks to buy, with a market capitalization of $23.67 billion.
In July, I recommended buying Pulte stock because it was trading for 6.8x its forward earnings. The biggest issues for investors at the time were twofold: First, would demand remain high? Second, could Pulte keep up with demand?
A year later, it’s clear that demand remains high for its new houses. In late April, it reported Q1 2024 results that beat analyst estimates on the top and bottom lines. Its shares rose on the news.
Across the board, its results were positive. Earnings per share increased 32% to $3.10, net new orders increased 14% to 8,379 homes and its unit backlog was 13,430, valued at an average price of $610,573. It finished the quarter with $1.8 billion in cash on the balance sheet and $1.96 billion in long-term debt, good for just $191 million in net debt or 1.7% of its total net capital.
The unit backlog was up 2.3% year over year, while its dollar value increased by 2.8%, with the average price per house $2,758 higher.
Its shares trade at 9.5x its 2024 EPS estimate of $11.88 and 8.7x its 2025 estimate of $12.94.
Its business remains very strong.
Taylor Morrison Home (TMHC)
Taylor Morrison Home (NYSE:TMHC) is the second-largest of the three homebuilder stocks to buy, with a market capitalization of nearly $6 billion.
In my July 2023 commentary regarding homebuilder stocks to buy, which I mentioned previously, I suggested that CEO Sheryl Palmer was a big reason for the company’s success in the past decade.
Palmer has run the company since August 2007. She took it public in April 2013 at $22 a share. Its shares are 156% from their IPO price, with much of the gains coming since September 2022.
The company’s big move came in 2020 when it acquired William Lyon Homes for $2.5 billion in cash and stock. As a result of the acquisition, TMHC became the fifth-largest homebuilder in the U.S. More importantly, it expanded into three new markets: Washington, Oregon and Nevada. It also strengthened its position in entry-level homes.
In 2024, its focus moved from acquiring finished lots to developing its own land, primarily to accelerate its growth. In 2023, it spent $1.8 billion on land acquisition and development in 2023. It plans to spend $2.4 billion in 2024 at the midpoint of its guidance.
As long as Palmer’s in charge, I like TMHC stock.
Green Brick Partners (GRBK)
Green Brick Partners (NYSE:GBRK) is the smallest of the three homebuilder stocks to buy, with a market capitalization of nearly $2.6 billion.
I’ve written about Green Brick several times because it is 25.2% owned by Greenlight Capital, the investment advisor run by value investor David Einhorn.
The company was co-founded by Einhorn and Texas real estate veteran Jim Brickman in 2009. It went public in 2014. It now operates in Texas, Georgia, and Florida, which are three of the fastest-growing markets in the U.S.
In December 2022, I recommended GBRK stock, suggesting that its gross margins, revenue growth and balance sheet were healthy. Today, they’re even healthier.
In Q1 2024, while its revenue was down 1% over last year, to $447.3 million, its EPS of $1.82 was a record for the first quarter, up 32.8% over last year, and a homebuilding gross margin of 33.4%, 580 basis points higher than Q1 2023. Most importantly, its debt to total capital was 18.3%, almost 10 percentage points less than in late 2022.
“We achieved the second highest quarterly sales orders in company history at 1,071 net orders, just shy of the Covid-fueled 1,082 orders in the first quarter of 2021,” CEO Jim Brickman stated in its Q1 2024 press release.
As homebuilders go, Green Brick is a diamond in the rough.
On the date of publication, Will Ashworth 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.
