6 Homebuilder Stocks to Consider

Construction Site

As housing starts continue to rise, homebuilder stocks are trending upward. These six look good – and yet are still undervalued.

The population of the United States is shifting. More than 10% of our population uproots themselves and their family annually. For the past 10 years, folks have been heading to the South from the Midwest and Northeast, by the droves. Now the pace seems to be picking up. And it seems to be shifting from urban to rural (backpedaling from recent migrations in the last decade or so).

New Jersey is one of the top move-out states for the last decade, according to United Van Lines, and it takes the #1 spot this year, mostly because of high taxes. In second place is Illinois (high taxes), and the remaining top five states that people are fleeing are New York (expensive housing and high income, property and sales taxes), Connecticut (expensive housing, utilities, and taxes), and Kansas (low wages).

Alternatively, the top five move-in states are: Idaho (great job market and low cost of living), Oregon (influx of tech industry jobs), Arizona (year-round sun and low cost of living), South Carolina (affordability, pleasant climate), and Washington (lots of jobs for young professionals).

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Those reasons for moving out and moving in are being supplemented by the effects of COVID-19. Rapidly declining rental prices are plaguing large urban centers, implying that supply is up, while demand is down.

The moves will affect many industries: energy, transportation, home goods and appliance sales, and housing, of course. Right now, housing—in spite of the coronavirus pandemic—is in pretty good shape. In June, housing starts in the United States rose 17.3%, to an annualized rate of 1,186 million, higher than the 1,169 million forecasted, and the highest reading in three months.

And that’s great news for the homebuilders – and homebuilder stocks. Right now, the largest builders in the U.S. are LGI Homes (LGIH), Lennar (LEN), D.R. Horton (DHI), Pulte Homes (PHM), Toll Brothers (TOL) and KB Homes (KBH). These six homebuilder stocks are all rated Strong Buy by analysts.

Let’s take a look at them:

6 Homebuilder Stocks to Consider

LGI Homes, Inc. (LGIH): The company specializes in entry-level homes, such as detached and attached homes, and move-up homes under the LGI Homes brand name; and luxury series homes under the Terrata Homes brand name. It owns 113 communities in Texas, Arizona, Florida, Georgia, New Mexico, Colorado, North Carolina, South Carolina, Washington, Tennessee, Minnesota, Oklahoma, Alabama, California, Oregon, Nevada, and West Virginia. For its second quarter, EPS were $2.21, up from $1.82 a year ago, and beating estimates of $1.49 per share. Shares trade at a P/E of 13.77.

Lennar Corporation (LEN): The company primarily sells single-family attached and detached homes in communities targeted to first-time homebuyers, move-up homebuyers, active adult homebuyers, and luxury homebuyers. It has communities in 21 states, and also provides mortgage financing, title insurance, and closing services. Lennar made $1.65 per share in its last quarter, beating forecasts of $1.18. Shares trade at a P/E of 11.34.

D.R. Horton, Inc. (DHI): The company sells single-family detached and attached homes in the East, Midwest, Southeast, South Central, Southwest, and West regions in the United States. It owns communities in 20 states and 51 markets in the United States under the names of D.R. Horton, America’s Builder, Express Homes, Emerald Homes, and Freedom Homes. The company also provides mortgages, title, and closing services. DHI earned $1.72 per share last quarter, beating estimates of $1.30. Twenty analysts have increased their estimates in the past 30 days. And the shares trade at a P/E of 12.78.

Pulte Group, Inc. (PHM): The company builds single-family detached, townhouses, condominiums, and duplexes under the Centex, Pulte Homes, Del Webb, DiVosta Homes, and John Wieland Homes and Neighborhoods brand names. It is the third largest homebuilder in the U.S., with communities in 40 major cities. Pulte earned $1.29 per share last quarter, higher than Wall Street’s estimates of $0.87. It trades at a P/E of 10.42.

Toll Brothers, Inc. (TOL): The company operates in two segments, Traditional Home Building and City Living. It designs, markets, and sells homes in urban infill markets through Toll Brothers City Living. And Toll Brothers develops, owns, and operates golf courses and country clubs; develops and sells land; and develops, operates, and rents apartments. It also owns architectural, engineering, mortgage, title, landscaping, lumber distribution, house component assembly, and manufacturing operations. The company serves move-up, empty-nester, active-adult, and second-home buyers in 24 states. Toll Brothers beat earnings estimates last quarter, posting EPS of $0.90, topping the $0.71 forecast. The company is expected to grow earnings at a rate of 38% next year, on 15% sales growth. The P/E is 12.54.

KB Home (KBH): The company builds attached and detached single-family residential homes, townhomes, and condominiums primarily for first-time, first move-up, second move-up, and active adult homebuyers. It also offers insurance products and title services, and has operations in Arizona, California, Colorado, Florida, Nevada, North Carolina, Texas, and Washington. KBH beat Wall Street’s earnings estimates last quarter by $0.03, posting EPS of $0.55. The company recently reported that gross orders in June and July had increased 14% year over year to 3,275, and net orders grew 17% to 2,682. The shares trade at a P/E of 11.03.

As you can see, each of these homebuilders is doing very well, earnings estimates are increasing, and the shares look fairly undervalued. It’s a personal preference, but it may not hurt to add one or more of these homebuilder stocks to your portfolio.

Nancy Zambell

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*This post has been updated from an original version.

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