4 Homebuilder Stocks to Avoid as the Housing Market Cools Off

NYSE: LEN | Lennar Corp. CI A News, Ratings, and Charts

LEN – Backlogs in construction and rising commodity prices led to tight supply in the housing market, thus creating a surge in housing prices over the past year. However, as demand has started to decline lately, homebuilder stocks Lennar (LEN), KB Home (KBH), Meritage Homes (MTH), and LGI Homes (LGIH) might witness a correction in the near term.

The proliferation of remote work, low mortgage rates, and diminished supply caused an increase in the U.S. new home sales in July 2021 by 1% following a significant decline for three straight months. Demand for homes is slowing in response to higher prices.

The national inventory of active listings decreased 25.8% year-over-year in August. The median national home price for active listings declined from $385,000 in July to $380,000 in August. 

Given such volatility in the housing market, fundamentally weak homebuilder stocks such as Lennar Corporation (LEN), KB Home (KBH), Meritage Homes Corporation (MTH), and LGI Homes, Inc. (LGIH) could witness a deeper correction in the near term. So, these stocks are best avoided now.

Lennar Corporation (LEN)

LEN is engaged in the construction and sale of single-family attached and detached homes, as well as buying and selling of residential land. The company also provides mortgage financing, title insurance, commercial real estate, investment management, and other financial services and manages multifamily rental properties.

On July 29, 2021, LEN’s LMC subsidiary, engaged in apartment development and management, announced the land closing for Paxton, a luxury mixed-use community in Tysons. The high-rise community will feature 447 apartment homes and offer 14,713 square feet of retail space, with various dining, entertainment, and transit options nearby. LEN expects to witness high demand for these apartments in the future.

LEN’s total costs and expenses for the homebuilding segment increased 13.8% from the prior quarter to $4.91 billion for the fiscal second quarter ended May 31, 2021. The company’s operating earnings from the financial earnings segment came in at $121.32 million, down 17.7% from the prior-year period. LEN had cash and cash equivalents of $2.58 billion as of May 31, 2021, representing a 4.5% decline from its record value in the 2020 fourth quarter ended November 30, 2020. The stock has lost 1.6% over the past month to close yesterday’s trading session at $104.37.

LEN’s weak prospects are reflected in its POWR Ratings. The stock has an overall rating of C, which equates to Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

LEN also has a C grade for Growth, Value, Momentum, Stability, and Quality. In the 25-stock, B-rated Homebuilders industry, it is ranked #7.

To see additional POWR Ratings for LEN’s Sentiment, click here.

KB Home (KBH)

KBH builds and sells attached and detached single-family residential homes, townhomes, and condominiums primarily for first-time, first move-up, second move-up, and active adult homebuyers in the United States. Besides that, the company also derives income from mortgage banking, title, and insurance services.

KBH announced the grand opening of Autumn Glen, a new-home community in Victorville, California, on September 2, 2021. Autumn Glen is just off Interstate 15, providing access to the Ontario International Airport, San Bernardino County’s natural attractions, and major employment centers, with various shopping, dining, and entertainment options nearby. KBH expects to witness high demand in the upcoming months.

During the fiscal second quarter ended May 31, 2021, KBH’s total costs and expenses increased 48.3% year-over-year to $1.27 billion. As of May 31, 2021, the company had $608.07 million in cash and cash equivalents, down 10.7% from the full-year ended November 30, 2020. Over the past three months, the stock has lost 4.5% to end yesterday’s trading session at $43.05.

KBH’s POWR Ratings are consistent with this bleak outlook. The stock has an overall rating of C, which translates to Neutral. In addition, KBH has a D grade for Quality. Moreover, it is ranked #21 in the same industry.

In addition to the POWR Rating grades I’ve highlighted, one can see KBH’s ratings for Growth, Value, Momentum, Stability, and Sentiment here.

Meritage Homes Corporation (MTH)

MTH designs, builds, and sells single-family homes ranging from entry-level to semi-custom luxury, acquires and develops land. The company also offers title insurance and closing/settlement services to its homebuyers and operates in the South and West of the United States.

To keep pace with the changing consumer preferences, on August 24, 2021, MTH announced new innovative enhancements in its website that provide extensive resources to home buyers starting their home purchase journey. MTH offers helpful videos and articles on homeownership and financing, self-guided tours, and 24-hour virtual website assistance, as well as highlights of its specific energy-efficient and healthy home offerings. MTH hopes to provide a better customer experience and witness expanding market reach in the future.

MTH’s total land and home closings costs for the fiscal second quarter ended June 30, 2021, came in at $932.63 million, representing a 14.6% rise from the prior year period. As of June 30, 2021, the company had $684.37 million in cash and cash equivalents, down 8.2% from the full year-ended December 31, 2020. MTH has lost 2.2% over the past month and ended yesterday’s trading session at $108.09.

It’s no surprise that MTH has an overall C rating, which translates to Neutral in our POWR Ratings system. In addition, the stock has a C grade for Value, Sentiment, Quality, and Momentum. The stock is ranked #13 in the same industry. Click here to see additional POWR Ratings for MTH (Growth and Stability).

LGI Homes, Inc. (LGIH)

LGIH designs, constructs, and sells 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 in the United States. The company provides information regarding floor plans and pricing and conducts tours of its homes based on the customer’s needs and budget.

On August 27, 2021, LGIH announced the opening of two new communities, Shadowbend and Big Sky Estates, in the Dallas-Fort Worth market. With access to premier amenities, LGIH is offering a new and spacious lineup of five and seven incredible floor plans in these two communities that range in size up to 2,500 and 2,700 square feet, respectively. LGIH expects to witness high demand for its properties in the upcoming months.

For its fiscal second quarter ended June 30, 2021, LGIH’s cost of sales increased 58.8% year-over-year to $577.43 million. As of June 30, 2021, the company had $111.70 million in cash and cash equivalents. LGIH has lost 7.2% over the past three months and ended yesterday’s trading session at $159.39.

LGIH’s POWR Ratings reflect this bleak outlook. The stock has an overall C rating, which equates to Neutral in our proprietary rating system.

The stock has a D grade for Stability. Click here to see the additional ratings for LGIH’s Sentiment, Momentum, Growth, Value, and Quality. LGIH is ranked #22 in the same industry.

LEN shares were trading at $101.89 per share on Wednesday afternoon, down $2.48 (-2.38%). Year-to-date, LEN has gained 34.72%, versus a 21.44% rise in the benchmark S&P 500 index during the same period.

About the Author: Sweta Vijayan

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...

More Resources for the Stocks in this Article

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