On two occasions in 2022, homebuilder stocks, as represented by the iShares U.S. Home Construction ETF (BATS:ITB), looked dead in the water.
The first seismic shock to ITB’s share price came in June 2022, when its share price fell below $50 for the first time since July 2020. Four months later, it came close, hitting a low of $50.28, before resuming its march higher.
Since that October 2022 low, ITB’s share price is up 68%. And if the housing data is any indication, it’s not about to lose its momentum.
What homebuilders have going for them is a U.S. housing shortage. This gives a rise to the tailwind for homebuilder stocks.
According to a June 20 article in Axios, the housing shortage — Freddie Mac estimates we’re 3.8 million housing units short — keeps home prices high. The median home price in America is $419,103. According to Redfin (NASDAQ:RDFN), that’s 40% higher than in January 2020, before the pandemic.
As Axios points out, the consensus was that higher interest rates would end higher prices. Nope. Thanks to a reasonably strong economy, only some people want to sell, putting home inventories at deficient levels. Supply and demand is doing its job.
The good news for homebuilders is that prospective home buyers are turning to new builds due to the resale inventory shortage.
Once again, homebuilders’ stocks are a screaming buy. Here are my three choices.
Lennar (NYSE:LEN) raised its full-year forecast for home deliveries in mid-June. Its prior guidance called for 64,000 homes at the midpoint of its outlook. It now expects to deliver 69,000, an increase of 5,000 homes from the end of Q1 2023.
For the first six months of 2023, it delivered 30,733 homes, 6% higher than a year ago. A 5% decrease in the average selling price ($449,000) offset that. Due to higher costs, its gross margin in the first six months was 21.9%, 650 basis points lower than in the first six months of 2022. However, the second quarter gross margin rose 130 basis points from Q1 2023.
The company continues to strengthen its balance while the business remains healthy. It’s always smart to do what’s important before it becomes necessary. This makes it one of those homebuilder stocks to consider.
“While our operating performance remains strong, we continue to strengthen and fortify our balance sheet and our future,” stated Executive Chairman Stuart Miller in Lennar’s Q2 2023 press release.
“We ended the quarter with homebuilding debt to capital of 13.3%, the lowest in our history, no borrowings on our $2.6 billion revolver and cash of $4.0 billion. With liquidity of $6.6 billion and cash on hand exceeding our debt, our balance sheet has never been in a stronger position.”
While a homebuilder’s financial situation can turn south quickly, Lennar’s making as much hay as possible while the sun shines.
I recently recommended PulteGroup (NYSE:PHM) because it was a bargain stock trading for less than 7x earnings — 4.7x the trailing 12 months and 6.8x forward earnings. By comparison, the S&P 500’s multiple is 25.5x. However, there is a caveat to Pulte’s valuation: most building stocks currently have single-digit price-to-earnings ratios. The average P/E ratio of the ITB ETF (65% of its holdings are homebuilders) is 9.52x, so PHM is cheap, but so are many of its peers.
My June 21 commentary arguing Pulte’s case still applies, especially as it relates to my introduction comments. Deutsche Bank analyst Joe Ahlersmeyer’s comments about improved demand fundamentals leading to higher orders and excess cash ring true.
A tight inventory of resales equals a bonanza for homebuilders. The big issue continues to be whether or not Pulte can keep up with demand.
In April, when Pulte announced its Q1 2023 results, the company was optimistic about its ability to meet demand.
“Within an evolving macro environment, consumers across all buyer segments and price points continue to demonstrate a strong desire for homeownership. With interest rates more stable and the supply of new and existing homes generally in balance with demand, we remain optimistic about the housing industry as we navigate this phase of the housing cycle,” stated CEO Ryan Marshall.
It finished the first quarter with a backlog of 13,129, valued at $8 billion, or an average of $608,000, 5% higher than a year earlier and considerably higher (35%) than Lennar’s.
Taylor Morrison Home (TMHC)
In February 202o, I discussed seven reasons why Taylor Morrison Home (NYSE:TMHC) was an excellent stock to own. My timing was a bit off — the markets hit the skids in March 2020, with the index losing 32% of its value in 34 days. The good news is that TMHC is up 485% from its April 3, 2020, low of $8.21.
One of the reasons I like Taylor Morrison is that veteran CEO Sheryl Palmer runs it. She’s run the Homebuilder since August 2007. That’s a 16-year tenure. Most CEOs last less than half that time. Shareholders are lucky to have her.
I’m a big proponent of women CEOs, directors, top senior management, and everywhere else in an organization. Women bring so much to the corporate table. Why more women aren’t leading America’s top companies remains a mystery.
That’s a big reason to invest in the company. It’s one of those homebuilder stocks people should have on their watchlists.
However, the most important reason it’s worth owning is the business is very healthy.
“Despite the modest decline in revenue, our focus on improving operating margins through strategic efficiencies allowed us to deliver a more than 20% increase in diluted earnings to $1.74 per share and 32% growth in our book value to $44 per share. These strong results drove a nearly 500 basis point increase in our return on equity to approximately 24%,” Palmer stated in its Q1 2023 press release.
In good times and bad, Taylor Morrison is a must-own homebuilder stock.
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.