Even though you might be thinking that housing activity is cooling down a bit after a big run over the last year, there’s still plenty of reasons to believe that the homebuilders are great stocks to own at this time. Although things like rising lumber costs and higher interest rates should not be ignored, the recent price action in the homebuilder sector should tell you all you need to know about whether or not the industry can continue its outperformance in the market.
Mortgage rates have been rising to start the year, but the average 30-year fixed mortgage rate is still at historic lows. With the demand for new homes expected to be steady over the next few years given that the number of Americans reaching the age of buying a home is on the rise, companies that are involved in homebuilding have real potential to deliver strong earnings growth over the next decade. It’s also important to think about the valuations of homebuilders, which aren’t as stretched as many other areas of the market at this time.
If you think that the rally in homebuilder stocks still has legs, several companies stand out. Let’s take a look at 3 homebuilder stocks making constructive moves.
Lennar Corporation (NYSE:LEN)
If you have to pick one homebuilder to buy at this time, Lennar Corporation is probably the best option. Lennar is one of the largest homebuilders in the United States and constructs homes for first-time, move-up, and active adult buyers. The company also provides financial services and has invested in multifamily rental properties for diversification. One of the things to note about residential real estate at this time is that there have been over 10 years of a production shortfall in the housing market. This is a big reason why new homes are scarce at the moment and means that a company like Lennar, which produces affordably priced homes, can capitalize on the current shortage.
Lennar reported its Q1 earnings this week and beat expectations on both sales and EPS. The company saw its revenues rise by 18% year-over-year to $5.3 billion and delivered 12,314 homes, up 19% year-over-year. One of the big numbers that stand out from the report is the company’s backlog, which grew by 25% to reach 22,077 homes during the quarter. Finally, Lennar announced that it is going to spin-off all or parts of its non-core businesses to focus on homebuilding and financial services. The spin-off will result in a joint venture to provide single-family homes for rent and is expected to be between $3 billion and $5 billion in size. Investors should view this move as a good thing since it will help the company focus more on its strengths and enhance corporate value.
Next, we have Fort Worth, Texas-based homebuilder D.R. Horton, another strong brand name in the U.S. homebuilders group. The stock has been a strong performer in 2021 and is up over 22% year-to-date. It’s another homebuilder that should be able to take advantage of trends such as aging millennials moving into single-family homes and out of high-rise apartments. Due to the cyclical nature of housing market conditions, it pays to invest in the best of the best. That way you know you own a company with financial strength and a strong management team that can navigate the ups and downs of the housing market with ease.
D.R. Horton is a great homebuilder stock to think about buying for several reasons. Since the company offers affordable entry-level homes with its Express Homes brand, it is well-positioned to target value-minded homebuyers in 2021 and beyond. It’s also worth mentioning that D.R. Horton has 42,100 homes in inventory and is off to a great start in 2021. The company reported Q1 consolidated revenues of $5.9 billion, a year-over-year increase of 48%. The company also saw net sales orders increase by 56% to 20,418 homes, which tells us that there is still plenty of juice left in the tank of the housing market.
Century Communities, Inc. (NYSE:CCS)
Last but not least is Century Communities, a company that specializes in the design, development, construction, marketing, and sale of single-family attached and detached homes. The company also has a financial services business that saw its Q4 revenue increase by 146% year-over-year. Century recently launched two new communities in one of the hottest U.S. real estate markets, the Las Vegas area. The company has exposure to some of the fastest-growing markets in the country, including Texas, Georgia, Nevada, North Carolina, and Utah. According to the company’s latest investor presentation, 80% of its deliveries are entry-level buyers, which is great news given the trends we’ve mentioned earlier in the article.
Century Communities had a banner year in 2020 and capped it off with a strong Q4 performance. The company reported a Net Income increase of 72% year-over-year in Q4 to reach a record $91.8 million along with EBITDA growth of 87%. Homes in backlog also improved by 66% to a Q4 record of 2,566 homes valued at $1.3 billion. What’s most impressive about the company’s 2020 was that Net Income grew by 82.4% to reach $206.2 million. The bottom line here is that Century Communities is one of the fastest-growing homebuilders that should be targeted by growth investors who want exposure to the industry.
D.R. Horton is a part of the Entrepreneur Index, which tracks some of the largest publicly traded companies founded and run by entrepreneurs.
Before you consider D.R. Horton, you'll want to hear this.
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