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The housing market remains on fire in many regions across the country. Home prices have steadily climbed higher since the devastating global real estate crash a decade ago. In fact, the current market appears to be accelerating to the upside.
A thriving job market, low interest rates, and consumers rushing to get a piece of the American Dream before mortgage rates potentially climb to unattainable levels are all powering the upward trajectory.
New home sales climbed 10% in 2017 to 615,000, with prices appreciating mid-single digits over the last half decade. Price growth was even higher in coastal areas and other hot markets.
But what I find most bullish about the next few years is the housing shortage.
According to Realtor.com, the United States is facing a housing shortage, particularly for first-time home buyers. Housing inventories are at the lowest level in two decades. Javier Vivas, director of economic research at Realtor.com, said, “It really is a shortage of historic proportions.”
The housing shortage translates into longer-term profits for builders and others in the housing business as the low inventory assures continued stable to higher prices and therefore profits.
Make no mistake: The SPDR S&P 500 Homebuilders ETF (XHB) is down about 10% so far this year. The disconnect between price performance and the actual market is due to unfounded interest rate fear. And that means a golden opportunity for homebuilder stock investors.
Here are five to buy now.
1. Lennar Corp (NYSE: LEN)
This Miami-based homebuilder is off nearly 7% this year, creating an ideal buying opportunity for long-term investors.
Boasting a market cap of over $14 billion, the company suffered a pre-tax litigation loss of $140 million, and earnings were about $0.50 lower per share year-over-year in fiscal 2017.
However, growth metrics remained very bullish with deliveries up 11%, new orders up 11%, and revenues jumping 15% in the same time frame.
I am also very excited about the CalAtlantic strategic move.
Lennar CEO Stuart Miller bullishly proclaimed, “Our company is very well positioned for future growth, and we look forward to another strong year in 2018. Our pending strategic combination with CalAtlantic, which is scheduled to close on February 12, 2018, will add to the future growth of our company as we strategically combine two great companies in markets that we know well with products that we know well, to create the leading homebuilder in the country.”
Buy now in the $59.00 per share range with stops at $53.93 per share and a target price of $75.00 per share.
2. D.R. Horton (NYSE: DHI)
Down over 14% this year, this $16 billion market cap company is ripe for bargain-hunting stock investors!
After a nearly 16% revenue increase in 2017, the numbers are again looking promising. So far in 2018, DHI is beating estimates and looking strong fundamentally.
Donald R. Horton, Chairman of the Board, bullishly stated, “With 45,751 homes closed in fiscal 2017, D.R. Horton completed its 16th year in a row as the largest homebuilder by volume in the United States. We generated positive cash flows from operations for a third consecutive year while growing both our revenues and pre-tax profits at a double-digit pace.”
Buy now in the $43.70 per share zone with stops set at $40.77 per share and a target price of $55.00 per share.
3. Toll Brothers (NYSE: TOL)
The Horsham, Pennsylvania-based, $7 billion market cap builder is lower than 7% this year, making it an ideal buy right now.
The company posted great numbers in the first quarter of 2018 with a nearly 20% jump in orders, a key metric for the future. A 7% home price increase and an astounding tax reform-related 87% net income improvement creates a very bullish picture for the future.
The stock is bouncing off the 200-day simple moving average (SMA), and it makes sense to buy in the $45.00 per share zone. Stops are suggested at $41.93 per share, and my target is $55.00 per share.
4. PulteGroup (NYSE: PHM)
The technical chart of this $8 billion market cap builder mirrors that of Toll Brothers.
While the stock is off 12% this year, new orders have jumped, the backlog is soaring, and sales have grown double digits annually for the last four years.
Strong fundamentals make this stock a buy in the $29.00 per share zone with a target price of $41.00 per share and stops suggested at $26.93 per share.
5. KB Home (NYSE: KBH)
The smallest stock on our list with a $2.5 billion market cap, KB Home is set up to be a great buy at the current price level.
The company shows strong fundamentals, with revenues jumping 22%, deliveries up 11%, and increased net income in 2017.
Get long now in the $28.60 per share zone with a target price of $35.00 per share and initial stops set at $25.77 per share.
Risks To Consider: A surprise interest rate increase is the wild card in the analysis. Should the Fed deviate from its planned slow-increase program, all bets all off on the homebuilder sector.
Action To Take: Consider adding one or more of the above homebuilders to your long-term portfolio.