It’s been an uneven economic recovery to date. However, one area that is unquestionably booming is the housing market. But the interesting thing is that it took more than low mortgage rates to convince home buyers to take the plunge.
What it took was a pandemic. Think I’m kidding? Look at the Housing Market Index (HMI). In September, the HMI posted a preliminary rating of 83. That’s a historical high. And this marks the fifth consecutive month the HMI has increased.
Simply put, Americans have a renewed interest in spreading out. For some urban apartment dwellers, this means a flight to a place of their own. Some that own homes in more densely populated areas are looking for more wide-open spaces.
And regardless of the outcome of the presidential election, the Federal Reserve has indicated it is in no hurry to raise interest rates. This means that mortgage rates should remain favorable no matter which party occupies the White House.
There are many ways for investors to profit from this housing boom. Homebuilder stocks are a logical choice. But other companies will benefit from the rise in homeownership.
To help you capitalize on this red hot sector, we’ve put together this special presentation.
Quick Links
- D.R. Horton
- Zillow Group
- Docusign
- Restoration Hardware
- Home Depot
- Alarm.com
- Sherwin-Williams
#1 - D.R. Horton (NYSE:DHI)
The first stock we’ll look at is one of the premium homebuilder stocks. D.R. Horton (NYSE:DHI) has climbed off its March lows and is now trading at a record high. The stock is up nearly 50% for the year.
To put that into perspective, the stock was up 8% in the early summer. New home construction is surging. In late July, the company reported revenue of $5.39 billion. The fact that this was higher than the prior quarter is not surprising. However, on a year-over-year (YOY) basis, that revenue was also significantly higher.
That’s just the top line. On the bottom line, DHI reported a 36% YOY gain. And if analysts are any indication, the stock still has higher to go.
It will be difficult for the company to repeat that strong growth in the future. However, since September, DHI stock has received price target upgrades from three analyst firms. The lowest of the three is projecting $81 per share, and the highest offer a price forecast of $90. Both would mark a significant gain from the stock’s current price of around $77 per share.
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
- $139.61
- Consensus Rating
- Hold
- Ratings Breakdown
- 7 Buy Ratings, 7 Hold Ratings, 2 Sell Ratings.
- Consensus Price Target
- $179.60 (28.6% Upside)
#2 - Zillow Group (NASDAQ:ZG)
Zillow Group (NASDAQ:ZG) is an online real estate database company. Zillow allows prospective home buyers to comb through over 100 million listings nationwide. The company sees growth in all three of its business units: its core internet, media, and technology (IMT) unit, its Zillow Offers unit, and its mortgages unit.
The company’s stock continues to move higher after a stellar earnings report in August. One catalyst is Zillow’s “Schedule a Tour” feature that is helping realtors identify high-quality leads. Zillow is also recouping some of the losses it sustained when it offered real estate agents discounts at the onset of the global pandemic.
The company’s Zillow Homes unit is currently trying to rebuild its inventory. Currently, the company has an inventory of approximately 440 homes. In 2018, the company had over 2,800 homes to sell.
ZG stock has climbed over 132% for the year and shows no sign of slowing down. The stock is up over 30% in September.
About Zillow Group
Zillow Group, Inc operates real estate brands in mobile applications and Websites in the United States. The company offers premier agent and rentals marketplaces, new construction marketplaces, advertising, display advertising, and business technology solutions, as well as dotloop and floor plans. It also provides mortgage originations and the sale of mortgages, and advertising to mortgage lenders and other mortgage professionals; and title and escrow services.
Read More - Current Price
- $73.77
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 12 Buy Ratings, 5 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $72.71 (1.4% Downside)
#3 - Docusign (NASDAQ:DOCU)
Docusign (NASDAQ:DOCU) is another beneficiary of the housing boom. One of the “rites of passage” for home buyers was the endless paperwork. Anyone that has gone through the process knows of the paperwork you have to sign to initiate the process. And then there’s the closing process, which is another flurry of paperwork.
Even prior to the pandemic, Docusign was providing a solution that home buyers and realtors quickly adopted. This trend towards a contactless, digital signing experience that can be done completely remotely was only enhanced by the mitigation efforts brought on by the novel coronavirus.
Docusign has competition. And that competition will continue to increase. However, at this time, it is the only pure-play, publicly-traded e-signature company. There is some concern that Docusign is bound to face a “coronavirus hangover” at the beginning of next year. The thinking is that the software-as-a-service (SaaS) company may not attract as many new customers as it has captured during the pandemic.
However, the company is priced at approximately 29x its forward sales, a very conservative target for SaaS companies.
DOCU stock is up by 190% in 2020.
About DocuSign
DocuSign, Inc provides electronic signature solution in the United States and internationally. The company provides e-signature solution that enables sending and signing of agreements on various devices; Contract Lifecycle Management (CLM), which automates workflows across the entire agreement process; Document Generation streamlines the process of generating new, custom agreements; and Gen for Salesforce, which allows sales representatives to automatically generate agreements with a few clicks from within Salesforce.
Read More - Current Price
- $94.41
- Consensus Rating
- Hold
- Ratings Breakdown
- 3 Buy Ratings, 7 Hold Ratings, 3 Sell Ratings.
- Consensus Price Target
- $92.45 (2.1% Downside)
#4 - Restoration Hardware (NYSE:RH)
Whoever said luxury was dead didn’t bother to talk to Restoration Hardware (NYSE:RH). The high-end home furnishing supplier is enjoying a great year. And it’s not about eye-popping revenue growth. Rather, investors reward the company for delivering on the tried-and-true, but never boring metrics like higher margins and increased earnings per share.
In the company’s last quarter, its revenue came in with just a slight growth on a year-over-year (YOY) basis. However, its bottom line came in over 50% higher YOY. That’s the kind of number that gets investors’ attention. And they like what they’re seeing.
The pandemic has made many homeowners realize they may not love the space they live in. But those who choose to stay in their current home are taking at least some of the money they would have spent on a vacation and putting it into their homes.
RH stock is up over 75% for the year and nearly 20% in just the last month.
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
- $398.26
- Consensus Rating
- Hold
- Ratings Breakdown
- 9 Buy Ratings, 5 Hold Ratings, 2 Sell Ratings.
- Consensus Price Target
- $402.40 (1.0% Upside)
#5 - Home Depot (NYSE:HD)
Home Depot (NYSE: HD) is one of my favorite stocks for playing the housing boom. People still need a way to get all their home projects done. And Home Depot has embraced the digital space and is now a player beyond its brick-and-mortar space.
In its most recent quarter, Home Depot posted a 23% year-over-year (YOY) revenue gain. And that was coupled with an equally strong 26% gain on the company’s bottom line. Simply put, the company is posting strong numbers, and it doesn’t appear that it will stop anytime soon.
Home Depot is not alone in the home improvement space. However, there appears to be more than enough business to keep more than one company happy. And the company does appear to have a nice first-mover advantage in the e-commerce space.
That gap will be closing, and investors may want to be aware of that. In fact, that may be the reason HD stock is “only” up about 28% for the year. But that shouldn’t discourage you from buying the stock. Not only is Home Depot providing investors with sustained growth, but it also offers a solid dividend. In fact, the company has increased its dividend every year since 2010, and the dividend looks quite safe.
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
- $392.60
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 23 Buy Ratings, 6 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $426.00 (8.5% Upside)
#6 - Alarm.com (NASDAQ:ALRM)
Home security is becoming one of the most significant home improvement projects that homeowners undertake. Many younger home buyers have grown up in smart homes and are comfortable with the idea of monitoring their house anytime, anywhere. And that is stoking the demand for products such as those offered by Alarm.com (NASDAQ:ALRM).
In its last quarter, the company showed strong year-over-year (YOY) revenue growth. However, that didn’t translate to the bottom line, which posted only a one cent YOY increase. Some of this may have been due to the pandemic. But the lasting effects from the slowdown may be on the commercial side of the business. The company reports a strong increase in U.S. residential demand since the lockdown measures have eased in many states.
ALRM stock is up nearly 40% for the year, and the consensus price target from nine Wall Street analysts suggests the stock has an upside of over 12% from its current level.
About Alarm.com
Alarm.com Holdings, Inc provides various Internet of Things (IoT) and solutions for residential, multi-family, small business, and enterprise commercial markets in North America and internationally. The company operates through two segments, Alarm.com and Other. It offers solutions to control and monitor security systems, as well as to IoT devices, including door locks, garage doors, thermostats, and video cameras; and video monitoring and analytics solutions, such as video analytics, escalated events, video doorbells, intelligent integration, live streaming, secure cloud storage, and video alerts.
Read More - Current Price
- $62.95
- Consensus Rating
- Hold
- Ratings Breakdown
- 2 Buy Ratings, 3 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $64.40 (2.3% Upside)
#7 - Sherwin-Williams (NYSE:SHW)
The last stock to look at is Sherwin-Williams (NYSE:SHW), and I’ll admit it’s a seasonal play. Fall and winter become one of the best times for homeowners to start painting both inside and out. The lower humidity means less moisture in the air and faster drying paint.
Enough about the weather, though. Let’s look at the stock, which is up just a modest 20% for the year. Still, the company has been able to post beats on the top and bottom lines throughout the pandemic. That being said, expectations have gotten high, and it will be interesting to see if the company delivers when it reports earnings later in October.
Sherwin-Williams got a boost from home renovation projects during the pandemic, even though most of its stores were shut down, at least temporarily. Now the company is likely to catch a tailwind from the surge in home buying.
Sherwin-Williams is also somewhat attractive to value investors. The company not only maintained its dividend, but it also increased it by 21 cents in February.
About Sherwin-Williams
The Sherwin-Williams Company engages in the development, manufacture, distribution, and sale of paints, coating, and related products to professional, industrial, commercial, and retail customers. It operates through three segments: Paint Stores Group, Consumer Brands Group, and Performance Coatings Group.
Read More - Current Price
- $345.47
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 12 Buy Ratings, 6 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $397.63 (15.1% Upside)
This is one of the more interesting economic outlooks of our time. On the one hand, the pandemic is creating genuine hardships for many Americans. The gross domestic product of the United States declined at an annualized rate of over 32% in the second quarter. That was the largest such drop in our nation’s history.
Realistically GDP is likely to stay constricted until the nation can get back to a pre-pandemic life. And that means finding a solution to the puzzle of the novel coronavirus.
On the other hand, it has created what we may look back on as a once-in-a-lifetime opportunity to buy homes at such incredibly low rates.
For those of us old enough to remember, this is a narrative that’s been going on since the mid-1990s. And even after the housing crash that brought on the great recession in 2007, the housing market continues to come back.
The conditions that are creating this housing market will remain in place well into 2021, and quite possibly beyond that. And that means that there are opportunities to benefit from the companies that stand to benefit the most from this growth.
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