In one of the strongest economies our nation has ever known, housing stocks should have been going through the roof. But it took the Federal Reserve practically giving money away for homebuyers to get their appetite back.
And then even with mortgage rates at historical lows, the novel coronavirus came on the scene and ruined the party again. Home buying and home building came to a halt. Some of which was simply due to the fact that Americans were staying inside.
One of the closely watched indicators of the health of the housing market is the National Association of Home Builders (NAHB) Housing Market Index (HMI). In March, prior to the national mitigation efforts, the HMI had climbed to 72. For reference purposes, a neutral reading is 50.
Although not unexpected, April showed just how far demand had fallen. The HMI plunged 42 points to 30. Things got slightly better in May as the index climbed to 37.
But that may be changing. In June, the HMI posted a better than expected 56.8%. After hitting 37 in May, this marked the Index’s largest monthly gain ever. And not surprisingly some lagging housing stocks got a much-needed jump start. Homebuilder stocks in particular have been on the rise in recent months.
To help you capitalize on what looks like an emerging trend for the rest of the year, we’ve put together this special presentation.
Quick Links
- D.R. Horton
- Pulte Group
- TopBuild
- Floor & Décor Holdings
- Restoration Hardware
- Cavco Industries
- Home Depot
#1 - D.R. Horton (NYSE:DHI)
D.R. Horton (NYSE:DHI) is one of many homebuilders that has picked itself up from the mat. In March the stock tumbled more than 50%. Let’s be honest, it’s hard to get excited about buying a new construction when there’s no construction activity taking place. But that’s all changed. DHI stock has made up that deficit and then some. In fact, as of this writing, the stock is up approximately 8% for the year.
As a result, recent analyst recommendations are bullish on the 12-month outlook for DHI stock. On June 15, Citigroup raised its price target for the stock from $56 to $69, which would be just over a 13% gain from the stock’s current level.
And if that kind of growth doesn’t excite you, keep in mind that D.R. Horton is a solid dividend stock. The company has increased its dividend in each of the last eight years.
D.R. Horton reports second-quarter earnings in early August. Those numbers will likely be dreadful as they will reflect nearly a month with no construction activity in large parts of the country. But analysts will be looking to see what the company’s outlook is for the future.
About D.R. Horton
D.R. Horton, Inc operates as a homebuilding company in East, North, Southeast, South Central, Southwest, and Northwest regions in the United States. It engages in the acquisition and development of land; and construction and sale of residential homes in 118 markets across 33 states under the names of D.R.
Read More - Current Price
- $163.13
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 9 Buy Ratings, 6 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $185.87 (13.9% Upside)
#2 - Pulte Group (NYSE:PHM)
PulteGroup, Inc.
The next stock to look at is Pulte Group (NYSE:PHM). Although PHM stock has climbed nearly 100% since the selloff in March, it hasn’t quite turned back to a gain for the year. One factor that goes into evaluating these home builders is size. Pulte Group is the third-largest home construction company in the United States (per number of homes closed). It operates in 44 markets in 23 states.
Analysts have a consensus rating of Hold on the stock. However, on June 15, Citigroup raised its target for PHM stock from $32 to $43. The stock moved up over 5% on that recommendation alone. If the stock were to hit that target, it would post a gain of just over 20% from the stock’s level at the time of this writing.
Pulte Group has paid out a dividend in each of the last two years. The company has a payout ratio of 13.75% which should give investors confidence that the dividend is safe, and perhaps will be boosted again.
About PulteGroup
PulteGroup, Inc, through its subsidiaries, primarily engages in the homebuilding business in the United States. It acquires and develops land primarily for residential purposes; and constructs housing on such land. The company also offers various home designs, including single-family detached, townhomes, condominiums, and duplexes under the Centex, Pulte Homes, Del Webb, DiVosta Homes, John Wieland Homes and Neighborhoods, and American West brand names.
Read More - Current Price
- $128.06
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 10 Buy Ratings, 6 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $145.00 (13.2% Upside)
#3 - TopBuild (NYSE:BLD)
Another way to play the housing sector other than the homebuilder stocks is with their suppliers. TopBuild (NYSE:BLD) is one of the leading companies in the installation and distribution of insulation and related building products to the U.S. construction industry.
The stock is up over 15% for the year despite plunging nearly 50% in just two weeks in March. In the last month alone, the stock is up close to 20%, undoubtedly due to increased demand brought about by contractors and home builders going back on site.
Because the company is a supplier for the construction industry, they should be a bellwether for the broader sector. On June 18, BLD stock got a lift from the analyst firm Benchmark that raised its price target for the stock from $113 to $139. That would be a gain of approximately 15% from the stock’s current level. BLD stock has a better rating than 85% of its peers making it one of the more compelling housing stocks to consider.
About TopBuild
TopBuild Corp., together with its subsidiaries, engages in the installation and distribution of insulation and other building material products to the construction industry. The company operates in two segments, Installation and Specialty Distribution. It provides insulation products and accessories, glass and windows, rain gutters, garage doors, fireplaces, roofing materials, closet shelving, and other products.
Read More - Current Price
- $351.05
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 8 Buy Ratings, 2 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $440.44 (25.5% Upside)
#4 - Floor & Décor Holdings (NYSE:FND)
Similar to TopBuild, Floor & Décor Holdings (NYSE:FND) is another supplier for the construction industry. It specializes in hard surface flooring and related products. FND stock is up over 10% in 2020. And looking at the stock through a wider lens, it’s up over 35% in the last 12 months.
It goes without saying that hard surface flooring is one of the key selling points for many homebuyers. And that’s not likely to go away any time soon. That should be a catalyst for the stock, not only for new construction but for remodels as well.
Floor & Décor Holdings has shown impressive growth despite just becoming an entity 20 years ago. The company has a market cap of $5.7 billion dollars. Part of that growth was being nimble enough to move into areas where competitors had been beaten up during the financial crisis and using the low-interest rates to grow the business.
On June 17, UBS raised its price target for the company from $48 to $65. That would be a nearly 15% gain from its current level.
About Floor & Decor
Floor & Decor Holdings, Inc together with its subsidiaries, operates as a multi-channel specialty retailer of hard surface flooring and related accessories, and commercial surfaces seller in Georgia. The company offers tile, wood, laminate, vinyl, and natural stone flooring products, as well as decorative accessories, wall tiles, and installation materials and tools; and vanities, shower doors, bath accessories, faucets, sinks, custom countertops, bathroom mirrors, and bathroom lighting.
Read More - Current Price
- $103.46
- Consensus Rating
- Hold
- Ratings Breakdown
- 5 Buy Ratings, 12 Hold Ratings, 3 Sell Ratings.
- Consensus Price Target
- $104.37 (0.9% Upside)
#5 - Restoration Hardware (NYSE:RH)
Remodeling can be just as significant as new construction. And Restoration Hardware (NYSE:RH) is positioned to serve both markets. The company specializes in high-end home furnishings. But the company does it with approximately 70 high-end galleries, a catalog business, and about 20 outlet stores.
Many homeowners are discovering that they may want to renovate their existing space. Whatever their motivation, RH can help these prospective buyers relieve themselves of that disposable income.
At a time when many home furnishing suppliers try to be all things to all people, RH unapologetically appeals to the luxury space. I can respect that, and apparently, so do many investors.
RH stock is up over 30% for the year and a whopping 175% in the last three months. And that is showing the strength of the company’s business model. Keep in mind, the company’s stores were closed during the pandemic. But the company provides personal delivery to ensure that they have control over the delivery experience. And when its stores are open, they provide in-store restaurants that consumers seem to love.
About RH
RH, together with its subsidiaries, operates as a retailer in the home furnishings market. The company offers products in various categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, baby, child, and teen furnishings. It provides its products through rh.com, rhbabyandchild.com, rhteen.com, rhmodern.com, and waterworks.com online channels, as well as operates RH Galleries, RH outlet stores, RH Guesthouse, and Waterworks showrooms in the United States, Canada, the United Kingdom, and Germany.
Read More - Current Price
- $336.80
- Consensus Rating
- Hold
- Ratings Breakdown
- 7 Buy Ratings, 6 Hold Ratings, 2 Sell Ratings.
- Consensus Price Target
- $326.14 (3.2% Downside)
#6 - Cavco Industries (NASDAQ:CVCO)
Manufactured and modular homes have made major advancements. The quality of these homes is making them very appealing for first-time homebuyers as well as for empty nesters who may not need a lot of house, but want privacy. And in many areas of the country, manufactured home communities are a very affordable housing option. Cavco Industries (NASDAQ:CVCO) is one of the leaders in this space.
CVCO stock got off to a great start in 2020, but like most stocks was savaged in the downturn and has not made a full recovery. But the trend is moving upwards. In the last month, the stock is up 10%.
One of the appealing things about Cavco is that it has separate insurance and mortgage divisions in addition to selling its homes. That gives the company multiple revenue streams that homebuyers of this type will typically avail themselves of since the qualifications are different in this sector.
About Cavco Industries
Cavco Industries, Inc designs, produces, and retails factory-built homes primarily in the United States. It operates in two segments, Factory-Built Housing and Financial Services. The company markets its factory-built homes under the Cavco, Fleetwood, Palm Harbor, Nationwide, Fairmont, Friendship, Chariot Eagle, Destiny, Commodore, Colony, Pennwest, R-Anell, Manorwood, MidCountry, and Solitaire brands.
Read More - Current Price
- $475.41
- Consensus Rating
- Buy
- Ratings Breakdown
- 2 Buy Ratings, 0 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $475.00 (0.1% Downside)
#7 - Home Depot (NYSE:HD)
If you want to look at the housing market a completely different way, you can simply look to gobble up shares of Home Depot (NYSE:HD). People staying at home were getting projects done. And that’s reflected in a stock that went up over 60% since bottoming out in March.
But that’s not really surprising. The company was on an upward trend. The novel coronavirus was just a speed bump. Once investors realized that having consumers at home with little reason to avoid the to-do list, they would start doing home projects, Home Depot stock made sense.
Home Depot has a bit of a moat that protects it from Amazon (NASDAQ:AMZN). That’s because, for the most part, Amazon leaves Home Depot alone in the home improvement category. But that’s not the only reason Home Depot is thriving. The company made a major push into the digital space last year. And they’ve embraced the omnichannel model of allowing customers to get the products they want, when they want them, where they want them delivered.
Home Depot is going to face competition from Lowe’s (NYSE:LOW), but for now, the stock has a first-mover advantage. And that should hold for the rest of this year at least.
About Home Depot
The Home Depot, Inc operates as a home improvement retailer in the United States and internationally. It sells various building materials, home improvement products, lawn and garden products, and décor products, as well as facilities maintenance, repair, and operations products. The company also offers installation services for flooring, water heaters, bath, garage doors, cabinets, cabinet makeovers, countertops, sheds, furnaces and central air systems, and windows.
Read More - Current Price
- $399.98
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 23 Buy Ratings, 6 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $426.00 (6.5% Upside)
If there’s been one thing that’s been clear about the stock market in 2020, it’s that investors want it to go higher. But I think the rally is based less on certainty about the fundamentals, but more that investors are willing the market to go higher.
This is interesting because investors generally hate uncertainty. And there are few sectors that don’t have uncertainty. In the housing sector, the big question is will construction be able to continue unabated? If so, then the outlook for housing stocks is very good.
But if there are regional shutdowns to stem a recurrence of the virus, that could be disastrous. That’s the risk that’s on the table. I think this market may be attractive for quite some time. And here’s why. Many Americans have been stuck at home. And for those homeowners who are continuing to work, they may be realizing they don’t like the current design of their home. All of a sudden, the open concept seems so 2019. Walls are starting to go back up, or at least that’s the desire.
The question will be whether owners choose to renovate an existing space or take a path of least resistance and search out a home that they can configure the way they want, from the ground up.
This will be one of the more interesting stories not just for the rest of 2020, but for years to come. Remember, some companies are going to be allowing workers to continue to work from home. So a home office may become a very real need.
More Investing Slideshows:
