I think the homebuilders are a good buy at these levels but the correction has momentum so they might be even better buys in a few weeks -
Barron's 6/9 -
The housing market has soared of late and shows no signs of it cooling down. D.R. Horton, Lennar, and other stocks could benefit.
Demand for housing has been red hot. The Case-Shiller U.S. National Home Price Index, for instance, is up 13% during the past year, a result of strong demand and a limited supply. Housing stocks haven’t reflected that strength recently. The SPDR S&P Homebuilders ETF (XHB) has fallen 6.9% during the past month, while D.R. Horton (DHI) and Lennar (LEN) are off around 11%, as worry that limited supply and high prices bring the boom to an end.
Sean Darby, global equity strategist at Jefferies, doesn’t think so. For one, the demand story doesn’t seem to be over just yet. The National Association of Home Builders Traffic of Prospective Buyers reading, for instance, is at its highest level since at least 1990. And those buyers can still enjoy ultralow mortgage rates—the 30-year fixed has dropped to 2.99%—which makes homes more affordable. Together, they could be enough to push housing stocks higher.
“On the surface, it would appear that the best of times for the US home builders are behind them but there are still several catalysts that are likely to keep the companies enjoying the sunshine,” he explains
In the meantime, housing stocks appear to trade at reasonable valuations. While earnings at D.R. Horton, Lennar, NVR (NVR), and PulteGroup (PHM) are likely to slow from an average of 42% in 2021 to 10.6% in 2022, according to FactSet. Meanwhile, the group’s average PEG ratio—a measure of valuation relative to earnings growth—is 0.5, according to Jefferies, lower than their five-year averages.
In other words, this is a dip that may be worth buying.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
CCS, MHO
