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Homebuilder IPOs: Timing Is Everything

Solid fundamentals aren't enough; the sector is out of favor


In the wake of the real estate market rebound, Wall Street rushed three homebuilders onto the public markets this year: Tri Pointe Homes (TPH), William Lyon Homes (WLH) and Taylor Morrison Home (TMHC).

Unfortunately, they have all fallen below their initial offering prices.

3 Hot Under-the-Radar Housing Plays
3 Hot Under-the-Radar Housing Plays

What went wrong? Well, the homebuilder sector already staged a big run in 2012, so it’s logical that there would be a pullback.

In fact, the iShares U.S. Home Construction ETF (ITB) has already given up its gains and them some, and is off almost 2% year-to-date. The index includes biggies like PulteGroup (PHM), Lennar (LEN), D.R. Horton (DHI) and Toll Brothers (TOL).

The other concern is the rise in interest rates, of course. Back in May, mortgage rates jumped by 1% or so. While this may seem minor, it could push some buyers out of the market. In fact, according to a recent survey from Credit Suisse, there was a drop in buyer traffic in July.

For the homebuilder IPOs in particular, though, there is little evidence that interest rates are much of a factor. In their latest earnings reports, the cancellation rates continued to drop on a year-over-year basis.

Besides, the revenue growth rates have been off the charts for each homebuilder IPO. In the most recent quarter, Taylor Morrison’s home sales hit $496 million — up 62% — and William Lyon’s spiked by 122% to $120.6 million. And Tri Pointe posted a six-fold surge to $51.1 million!

If the earnings calls are any indication, the momentum is likely to continue for these stocks. The overall supply of housing is at a low level, as home construction has been starved since the real estate market crashed in 2006. At the same time, household formation continues to increase, which has been a nice source of demand.

Plus, rising interest rates are likely the result of the improvement in the U.S. economy, which is certainly another nice driver for demand. Given all this, it should be no surprise that the homebuilder IPOs have growing backlogs and nice revenue gains.

Still, this does not mean investors should jump into the stocks. Again, the sector is out of favor.

As a result, the valuations could remain muted for a while, even though the fundamentals are strong. Until there are signs that money is flowing into the sector again, it’s probably better to take a wait-and-see approach.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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