Why You Should Buy Homebuilder Stocks Right Now

Residential apartment blocks converging in the center

Today, I want to talk about one of my favorite undervalued sectors: homebuilder stocks. But first, let’s talk about investment strategies amid this ailing market.

My Investing Strategy

There are many different investing strategies that can be used effectively in the stock market. Each strategy comes with both benefits and nail-biting phases. It certainly helps to approach stock investing with your eyes wide open. Your familiarity with potential risks can help you assess and navigate those lackluster time periods when your investments are simply not performing for months on end.

Undervalued growth stocks are my favorite stocks to own, because during stock market corrections, I don’t have to worry whether the quality of companies I’ve invested in is suffering. Both undervalued and growth are key words in that scenario. Undervalued doesn’t simply mean a stock with a low price and growth doesn’t simply mean a stock whose share price went up recently.

My value definition is comprised of a stock’s relatively low price/earnings ratio (P/E) and debt levels. I seek value because investors can quickly eliminate some significant risks by removing high-P/E stocks and debt-ridden companies via their stock screening processes.

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My growth definition is comprised of projected double-digit earnings per share (EPS) growth. If a company’s profits are growing with some attractive momentum, I know that their stock price will eventually follow suit.

Like most of the market, homebuilder stocks have had a rough go of late.

2018 has presented stock investors with a preponderance of undervalued industries to explore. If you focus on quality companies, you can scoop up great bargains during frustrating stock markets, thereby enhancing your potential returns as the markets eventually recover. And they do eventually recover!

Despite the fact that we’ve experienced two 10% corrections in the S&P 500 index during 2018, the index rose to new all-time highs between the two corrections! I’ve no doubt that we’ll experience a new all-time high in the coming months. Therefore, I’m going to continue accumulating stock market bargains.

I’ve recently written about the downturn in FANG (Facebook, Amazon, Netflix, Google) stocks, and also about buy-low opportunities in airline stocks. Now let’s turn our attention to homebuilder stocks.

Homebuilder Stocks Undervalued

Investors have been panicked this year because rising interest rates have caused them to believe that U.S. citizens will cease purchasing new homes. You can apparently relax.

Tom Lee, head of research and co-founder of Fundstrat Global Advisors, points out that rising interest rates are historically correlated with rising new home starts until interest rates hit about 8%. That means investor worries about current interest rate levels are misplaced. He asks us to focus instead on this bullish statistic: there’s a pending 10-year surge in new home demand coming from millennials – a demand that should fuel ongoing revenue and profit growth for homebuilders.

What’s more, homebuilding companies are delivering incredible earnings growth. The recent multi-year trend of increasing profitability is slowing at a few major homebuilders, yet remaining quite strong at others. These are Wall Street’s projected 2019 earnings growth rates at several prominent homebuilders: 78.9% at KB Home (KBH), 33.4% at Lennar (LEN), 16.0% at Taylor Morrison Home (TMHC), 13.4% at D.R. Horton (DHI) and 9.5% at Toll Brothers (TOL). That’s quite a shopping list!

In addition, here’s a fascinating statistic from Mr. Lee: if you bought homebuilder stocks on October 20 and sold them on April 30, annually during the last 19 years, you would have earned an 18% average annual capital gain, beating the S&P 500 performance by 12.8% per year. Since we’re very close to the beginning of that supposedly-profitable time frame, and mired in a stock market correction, it’s likely that new investments in homebuilder stocks could reap outsized rewards.

If you’d like to mitigate one more layer of investment risk by doing a little market timing, here’s my final suggestion as you’re preparing to capitalize on this undervalued growth industry. When stocks are trading at annual lows as we approach the year’s end, investors often sell those stocks in order to lock in capital losses that offset their portfolio gains, thus lowering their tax burdens when filing federal income tax returns. The season of tax-loss selling ends on December 31. Come January, the selling pressure is gone – unless, of course, there are serious problems at a particular company.

My suggestion is to look at the homebuilder stocks, figure out which ones fit best within your stock portfolio, and prepare to buy low, either now or on January 2, 2019. Either way, homebuilder stocks are overdue for an upturn. Plan accordingly!

Crista Huff

Buy Low, Sell High

Crista Huff is the lead analyst of Cabot Undervalued Stocks Advisor. Her goal is to assist you in outperforming the major U.S. stock market indexes while minimizing risk, by screening many hundreds of stocks for growth, value and bullish technical charts.

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