Eight Top Housing Stocks to Buy Go Beyond Traditional Home Builders 

Paul Dykewicz

[house in a shopping cart]

Eight top housing stocks to buy extend beyond the traditional home builders that I focused on in my stock column last week.

The eight top housing stocks to buy outside of the traditional home builders also offer plenty of potential upside to profit from the ongoing economic recovery that is taking the industry to record levels as the economy recovers from the COVID-19 crisis. Not only are there more real-estate agents than homes for sale in the United States, but the U.S. housing market is 3.8 million single-family homes short of meeting current demand, according to mortgage financier Freddie Mac.

The eight best housing stocks to buy feature companies that develop and construct residential real estate, but also include businesses that serve important niche segments of the industry. The U.S. Commerce Department reported on April 16 that domestic home building reached nearly a 15-year high in March but cautioned that rising lumber prices and supply constraints could limit home builders and other industry companies from continuing to boost production sufficiently to satisfy huge housing market demand.

Eight Top Housing Stocks to Buy Include Dream Finders Homes

Specialty regional home builder Dream Finders Homes, Inc. (NASDAQ:DFH), of Jacksonville, Florida, is a recommendation of BoA Global Research that offers enlarged potential following its October 5, 2020 acquisition of H&H Homes, a home builder in Fayetteville, North Carolina. H&H Homes, founded in 1991 by Ralph and Linda Huff, operated in 10 markets throughout the Carolinas and had built more than 9,000 homes by the time it was acquired.

“The advantages to both companies are numerous,” H&H Homes CEO Ralph Huff said when he announced the agreement on Oct. 5. “Dream Finders has a diverse geographic footprint that, when coupled with the Carolinas footprint of H&H Homes, will lend itself to major growth. It was also important to us that the well-respected H&H brand be continued which will benefit our employees, suppliers, trade partners and over 1,800 Coldwell Banker Advantage Real Estate Agents.”

“Dream Finders has found a great strategic fit in the H&H acquisition that will allow us to expand our footprint to the great state of North Carolina,” said DFH Founder and CEO Patrick Zalupski. “Ralph and Linda Huff have built a truly wonderful business, with a culture of building high quality homes that provide significant value and lifestyle to their customers, which aligns well with Dream Finders’ core values.”

Eight Top Housing Stocks to Buy Offer Strong Potential

BoA’s $18 price objective on DFH shares is based on a fiscal year 2021 estimated price-to-earnings (P/E) multiple of roughly 13.5x, implying a price to book (P/B) multiple of 3.9x. At 13.5x fiscal year 2021 estimated earnings per share (EPS), BoA values DFH at a premium to its group average to reflect the potential for stronger growth in the next few years.

However, BoA cautions that risk exists to DFH and industry growth in general due to substantial crosscurrents that include construction cost inflation, surging home prices, overall affordability challenges and land/labor constraints. Specifically, downside risks include stretched valuations with multiple compression likely; margin targets possibly at risk as the company likely will need to outbid larger competitors for land, labor and materials; potential pull-forward demand from COVID-19 causing an air pocket of demand in 2021; affordability challenges from surging home price appreciation and rising interest rates; and slowing U.S. economic growth.

Potential positive signs entail strong housing fundamentals that support demand; continued net migration to markets where DFH has a presence; improving margins and return metrics; a potential easing in home price appreciation and/or pullback in interest rates. Dream Finder Home completed its initial public offering (IPO) on Jan. 21 by selling 9.6 million shares of Class A common stock at $13 per share. With a closing price of $22.14 on April 21, the stock is up 70.31% since it went public three months ago.

Chart courtesy of www.StockCharts.com

Eight Top Housing Stocks to Buy Feature Forestar Group

Forestar Group Inc. (NYSE:FOR), a real estate, oil and gas, and other natural resources company based in Austin, Texas, received a $27 price objective from BoA, based on a fiscal year 2021 estimated P/B multiple of roughly 1.3. BoA described that multiple as “appropriate” when balancing recent strength in the housing market with continued economic uncertainty from COVID-19.

Forestar Group’s relationship with D.R. Horton, Inc. (NYSE:DHI) will likely warrant a higher valuation multiple over time, according to a recent BoA research note. However, the relationship is a “show-me” story in the eyes of investors who need to see tangible benefits, the investment firm added.

“We also believe the market may discount land developer multiples given the perception of land heavy entities, with high levels of entitlement risk — which is not the case for FOR,” BoA wrote. “We expect FOR’s valuation metrics to expand in the years ahead, supported in part by its production-driven strategy and the substantial growth and consistent returns on capital it should foster over time.”

However, BoA noted Forestar Group carries risk such as potential inability to achieve significant growth and profit opportunities; substantial debt and possible equity financing; general cyclicality of new single-family home construction; a fiercely competitive industry for land; a historical reluctance of investors to view housing stocks as long-term investments; and tight labor markets. Plus, Forester Group has a potential forward consensus P/E estimate from analysts at a rather lofty 48.54.

Forestar Group’s share price has advanced 8.36% in the past three months, 21.46% so far this year and 98.46% in the past year, compared to its sector index rising 3.91%, 16.52% and 63.87%, respectively. The stock is 10.6% below its current BoA price objective, so it does have room for growth but not close to the nearly doubled price it achieved in the past year.

Chart courtesy of www.StockCharts.com

Hayward Holdings Joins Eight Top Housing Stocks to Buy

Hayward Holdings, Inc. (NYSE:HAYW), a global manufacturer of residential and commercial pool equipment in Berkeley Heights, N.J., obtained a Buy rating and $21 price objective from BoA. The investment firm described the company as well-positioned within the $4.6 billion pool replacement parts market and mentioned its 75% aftermarket exposure as a source of resilience through economic cycles.

BoA further wrote that the strong brand and capital-light business of Hayward Holdings would continue to drive solid margins, returns and cash flow. The $21 price objective is based on a fiscal year 2021 estimated adjusted enterprise value/EBITDA multiple of roughly 21x. In determining the adjusted enterprise value/EBITDA multiple underlying its price target on HAYW shares, BoA considered current valuation multiples for pool equipment manufacturing competitors and other pool and outdoor living companies.

“We applied the most significant weighting to the average multiple of HAYW’s two closest competitors (PNR, FDR.SM), given that HAYW and these two companies control roughly 72% of the global pool parts market on a combined basis,” according to BoA. “However, we also recognize HAYW’s above average margins and returns and the fact that PNR and FDR.SM are arguably not pure comps.”

For example, Pentair plc (NYSE:PNR) operates non-pool related businesses. As a result, BoA concluded that including pool and outdoor living companies in the comparable estimates is warranted. 

One of the Eight Top Housing Stocks to Buy Slips After Recent IPO

On March 11, Hayward Holdings priced an initial public offering of 40,277,778 shares for its common stock, with 22,200,000 shares offered by Hayward and 18,077,778 shares supplied by existing stockholders. The initial public offering price came in at the $17.00 low-end price of its range that had a top end of $19.00 per share. Since then, the stock has fallen 4.53%, just a bit more than its sector’s drop of 4.49%.

Downside risks, according to BoA, are higher financial leverage than many building product peers; real and perceived COVID beneficiaries could lag as the economy re-opens; international expansion could negatively impact margins and valuation multiple; effectiveness of its Omni app to drive sales remains unclear; and rising interest rates could make financing pools more expensive.

Chart courtesy of www.StockCharts.com

JELD-WEN Holding Named Among Eight Top Housing Stocks to Buy

JELD-WEN Holding, Inc. (NYSE:JELD), a wood window and door manufacturing company in Charlotte, N.C., received a Buy rating and a $36 price objective from BoA, based on a 2021 estimated adjusted enterprise value/EBITDA multiple of roughly 9.0x. At 9.0x adjusted enterprise value/EBITDA, JELD would trade within its limited historical range dating back to its 2017 IPO, which BoA called appropriate due to current strength in both new construction and repair and remodel markets, despite rising affordability headwinds.

Potential catalysts to the share price include a sooner-than-anticipated favorable outcome in its Steves & Sons lawsuit; possible sale to a strategic or financial buyer; improved prospects for winning back wood windows customers without significant discounting; successful execution on strategic cost plans; growing demand in U.S. residential new construction; recovery of Australia’s economy; reduced commodity and freight costs; and increased pricing power.

Downside risks include a negative Steves & Sons lawsuit outcome; challenges winning back wood windows customers; failure to execute on its strategic cost cutting; decelerating demand in U.S. residential new construction; a slower-than-expected recovery in Australia’s economy; rising commodity and freight costs; worse-than-expected pricing power; and potential slowing of the U.S. economy.

JELD-WEN’s share price has climbed 0.72% in the past three months, 16.32% so far this year and 223.11% in the past 12 months, compared to its sector jumping 10.62%, 20.64% and 134.65%, respectively.

Chart courtesy of www.StockCharts.com

Masco Makes List of Eight Top Housing Stocks to Buy 

Masco Corp. (NYSE:MAS), a Livonia, Michigan-based manufacturer of products for the home improvement and new home construction markets, earned a Buy rating and a $69 price objective from BoA on a 2021 estimated adjusted enterprise value/EBITDA multiple of roughly 13x, implying a 2021 estimated P/E multiple of about 21x. Historical valuation multiples are less relevant for MAS, given the recent transformational sales of its Windows and Cabinets businesses, which should support significant multiple expansion over time, BoA wrote in its latest housing stock research note.

BoA cited downside risks to its price target of a possible slowdown in the residential rest and relaxation (R&R) market; larger-than-expected declines in paint margins; pricing pressure from large customers; rising interest rates increasing the cost of home equity loans; the need for greater-than-expected levels of investment spending; tariffs on imported goods; and a slowing U.S. economy. Possible catalysts to BoA’s price target are a snapback in the residential R&R market; a drop in input costs; declining interest rates; and tariff relief on imported goods.

Masco’s share price has jumped 8.68% in the past three months, 15.86% so far this year and 63.67% in the past 12 months, compared to its sector rising 10.62%, 20.64% and 134.65%, respectively.

Chart courtesy of www.StockCharts.com

Eight Top Housing Stocks to Buy Welcome Mr. Cooper Group

Jim Woods, editor Successful Investing, Intelligence Report and Bullseye Stock Trader, recently recommended mortgage servicing company Mr. Cooper Group Inc. (NASDAQ:COOP), which he gained direct knowledge of when it serviced the mortgage on his home. The company bought his mortgage from another servicer, but typically derives most of its revenue from new home loans, also known as originations.

These new residential mortgage loans are made through a direct-to-consumer channel, which provides refinance options for existing customers by purchasing or originating loans from mortgage bankers and brokers, Woods explained. When running Bullseye Stock Trader criteria screens on COOP, Woods found strong earnings growth, with the company’s estimated earnings per share (EPS) rising 112% in 2020 and its first-quarter EPS growth expected by consensus analysts’ projections to near 230% year over year.

Columnist and author Paul Dykewicz meets with stock picker Jim Woods before COVID-19.

As for share price performance, COOP has seen a 313.16% surge over the past 52 weeks to put it in the top 7% of all public companies in terms of relative price strength, Woods mentioned. But its shares have dipped 11.33% in the past month.

“Technically speaking, COOP is building a base right above its 50-day moving average,” Woods continued. “That could very well prove to be a solid handle in the bullish cup-with-handle chart pattern. More importantly, it’s also a great entry point.”

Chart courtesy of www.StockCharts.com

Eight Top Housing Stocks to Buy Incur Recent Sale of Title Business

On March 15, Mr. Cooper Group announced the signing of a definitive agreement to sell its title business, which operates under the brand name Title365, to Blend Labs, Inc. for $500 million, consisting of $450 million in cash and a retained interest of 9.9%, subject to certain adjustments. The sale is expected to close in the second quarter of 2021, pending customary conditions such as regulatory approval. As part of the transaction, Title365 will retain all cash generated between March 15 and the closing to benefit the acquirer, so it is not expected to contribute to Mr. Cooper Group’s earnings in the second quarter.

Mr. Cooper Group expects to record an after-tax gain of approximately $350 million and receive cash proceeds net of transaction costs and cash taxes of approximately $400 million upon closing. Title365 has produced strong results to contribute to Mr. Cooper Group’s profitability and operating momentum in the last year, but it falls outside the seller’s core business of mortgage servicing and originations, Jay Bray, chairman and CEO of Mr. Cooper Group, said in a statement.

The decision to sell Title365 followed a comprehensive strategic review that concluded the niche business would gain greater investor credit as part of a company like Blend, where the unit will have a “significant strategic impact,” Bray said. 

Mr. Cooper Group Vice Chairman and CFO Chris Marshall added, “We’re pleased with the terms of the transaction which, once closed, will add meaningfully to our liquidity and tangible book value, and should reinforce our strong commitment to generating shareholder value.”

However, given rising interest rates and surging home price appreciation, BoA revisited its housing affordability analysis across 110 markets, including 43 of the top 50 home building metropolitan statistical areas (MSAs) by volume. Key takeaways were: 1) the economics of homeownership relative to renting faded versus a January analysis, and 2) it could become increasingly challenging for the median earner in many markets to obtain mortgage financing.

Eight Top Housing Stocks to Buy Gain Attention from Money Manager

“Investors find a lot of the peripheral construction stocks challenging for two reasons,” said Hilary Kramer, who hosts the nationally aired “Millionaire Maker” radio program and heads the GameChangers and Value Authority advisory services. “First, for companies like Johnson Controls Inc. (NYSE:JCI), a housing boom just isn’t enough to offset a slack commercial real estate environment. I love what the residential market does for JCI, but I still can’t bring myself to buy the stock right now. Second, the materials sector has already baked in years of infrastructure spending that never happened, which makes the stocks a lot less attractive for those trying to buy in today.”

Instead, Kramer suggested investors who are bullish on infrastructure to be selective on materials. 

“Don’t buy the most popular names and work down the list. Start with the stocks that are still relatively cheap relative to their growth rates. U.S. Concrete Inc. (NASDAQ:USCR) is no bargain at 28X earnings but, given its anticipated growth trajectory, it’s still a prize compared to Vulcan Materials Co. (NYSE:VMC) at 35X or Martin Marietta Materials Inc. (NYSE:MLM) at a 31X multiple. And if you don’t like cement, Freeport McMoRan Inc. (NYSE:FCX) gives you copper and a much more dramatic post-pandemic rebound than all these companies put together.”

Paul Dykewicz conducts a pre-COVID-19 interview with Hilary Kramer, whose premium advisory services include IPO Edge2-Day TraderTurbo Trader and Inner Circle.

Mortgage Underwriters Earn Berths Among Eight Top Housing Stocks to Buy

Second, look to the mortgage underwriters, Kramer counseled. Mortgage REITs like Annaly Capital Management Inc. (NYSE:NLY) and AGNC Investment Corp. (NASDAQ:AGNC) suffered a few years ago when interest rates inverted and then got “pushed to the curb” in the pandemic, but they’re bouncing back now, she added.

New York-based Annaly Capital Management, a mortgage real estate investment trust, invests its residential assets primarily in agency mortgage-backed securities and debentures. The REIT features a forward dividend yield of 10.0%, a price-to-sales ratio of 31.44% and a consensus forward price-to-earnings ratio of a modest 8.1%.

With a double-digit-percentage dividend yield and a low price-to-earnings ratio to entice investors, the REIT has jumped 8.45% in the past three months, 6.27% so far this year and 65.65% in the past year. Despite those strong gains, investors should consider that the sector’s average return exceeded 14.51% in the past three months, 14.55% so far this year and 90.13% during the past year.

Annaly Capital Management Ranks Among Eight Top Housing Stocks to Buy

Annaly Capital Management generates nearly all its revenue from the spread between interest earned on its assets and interest payments it makes on its borrowings. The REIT’s management chose to sell the commercial real estate segment of its business in a transaction announced on March 25 to Slate Asset Management for $2.33 billion. The sale represents substantially all the assets that comprise Annaly Capital Management’s Commercial Real Estate business, including equity interests, loan assets and commercial mortgage-backed securities.

The transaction is expected to let the REIT focus on residential assets and not have a material effect on the seller’s financial metrics such as book value, core earnings and dividend. Proceeds from the deal, once closed, should help to pay down the seller’s debt and to purchase selected assets that may include residential and corporate credit assets. Upon closing, the transfer of the commercial real estate business is expected to be completed by third-quarter 2021.

Chart courtesy of www.StockCharts.com

AGNC Investment Corp. Gains Place Among Eight Top Housing Stocks to Buy

AGNC Investment Corp. is a real estate investment trust that invests in agency residential mortgage-backed securities. The firm’s asset portfolio consists of residential mortgage pass-through securities and collateralized mortgage obligations whose principal and interest payments are guaranteed by U.S. government-sponsored entities such as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, or the Government National Mortgage Association. 

AGNC offers a forward dividend yield of 8.31%, a price-to-sales ratio of 8.72% and a consensus forward price-to-earnings ratio of 6.90%, according to Morningstar. The REIT’s share price rise of 11.19% for the past three months, 13.33% year to date and 56.59% for the last 12 months fell below its sector average of 14.51%, 14.55% and 90.13%, respectively. 

The comparative underperformance of AGNC to its sector may be an indicator that further upside for the REIT remains ahead. In statistics, a regression to the mean describes a phenomenon that is relevant with stock prices in which a future point will be closer to the average than a previous outlier.

 

Chart courtesy of www.StockCharts.com

“The worst is over for housing,” Kramer said. “In the boom, the companies that hold the loans will go on paying big dividends for years to come.”

Pension Fund Chairman Favors Fund Instead of Eight Top Housing Stocks to Buy 

“Home builder optimism remains steady,” said Bob Carlson, chairman of the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets. “The Housing Market Index from the National Association of Home Builders (NAHB) was 83 in April, compared to 82 in March.” 

The home builders’ association reported that demand for new homes remains strong, but risks include increased prices and supply shortages. There also is an inadequate inventory of homes and building lots for sale. Rising interest rates and housing prices, as well as labor shortages, pose problems for potential buyers.

Low Interest Rates, Economic Recovery Lift Eight Top Housing Stocks to Buy

However, housing stocks should benefit as interest rates stay low and the economy recovers from the pandemic, said Carlson, who also leads the Retirement Watch investment newsletter.  They further are going to benefit longer term as the millennials age and enter their prime home-owning years, he added.

However, home builders’ profitability is limited by shortages of labor and materials, even though they help to prevent overbuilding and keep demand high, Carlson continued.

Pension fund and Retirement Watch leader Bob Carlson answers questions from Paul Dykewicz prior to COVID-19-related social distancing.

Carlson, who favors investing in a fund rather than individual housing stocks, told me one way to invest in the industry is through SPDR S&P Homebuilders (XHB), an exchange-traded fund (ETF) that has risen about 26.83% so far this year after zooming 132.11% during the past 12 months. SPDR S&P Homebuilders is intended to provide investment results that correspond to the total return performance of the S&P Homebuilders Select Industry Index, before fees and expenses.

XHB, which soundly beat its category’s 39.63% return and its index’s 69.39% jump during the past year, seeks to give investors exposure to the home builders segment that consists of subsectors such as Building Products, Home Furnishings, Home Improvement Retail, Home Furnishing Retail and Household Appliances. The fund also aims to track a modified equal-weighted index to provide unconcentrated industry exposure across large, mid- and small-cap stocks.

Eight Top Housing Stocks to Buy Withstand Wicked COVID-19 Crisis 

COVID-19 vaccination acceleration in recent months raises hope among many people that the number of new cases due to the virus will slow rather than surge. Optimism comes from the Food and Drug Administration (FDA) approving a third COVID-19 vaccine with Johnson & Johnson (NYSE:JNJ), but the company has faced recent setbacks that include manufacturing problems and a regulatory safety hold on use of its product that has halted its near-term prospects as a vaccine maker.

U.S. COVID-19 cases have climbed to 31,793,035 and led to 568,470 deaths, as of April 21. COVID-19 cases worldwide have soared to 142,964,759, with deaths totaling 3,044,475, according to Johns Hopkins University. America has suffered the most COVID-19 cases and deaths of any country by far.

The eight top housing stocks to buy give investors a variety of ways to profit from the recent $1.9 trillion federal stimulus package, rising COVID-19 vaccine availability and an ongoing economic reopening. Those catalysts hold the potential to propel the eight top housing stocks to buy further in the months ahead.

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street JournalInvestor’s Business DailyUSA Today, the Journal of Commerce, Seeking Alpha, GuruFocus and other publications and websites. Paul, who can be followed on Twitter @PaulDykewicz, is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The book is great as a gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many others.

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