One of the strongest sectors of the economy is housing. Unlike nearly every other asset, it didn’t decline during the depths of the crisis.
In hindsight, this was a harbinger of its outperformance in the ensuing months. Despite recent gains, if we look forward, the outlook for housing remains bullish.
Rising Home Prices
This is evident from the Case-Schiller US Home Price Index which has continued trending to new highs and saw no decline during the spring of last year:
Like any asset, supply and demand are the most important factors. Housing supply remains close to historically, low levels.
Demand is strong due to low mortgage rates, strong household balance sheets, and favorable demographics as Millennials enter their peak buying years. The coronavirus resulted in a short-term surge in demand as well due to people moving from urban to suburban and rural areas especially with people working from home.
3 Stocks to Buy
Until these bullish supply and demand dynamics change, investors should continue buying housing stocks on weakness.
Currently, such an opportunity has presented itself. From Monday’s open to Thursday at 10 AM, the S&P 500 dropped 4%. From these lows, it’s recouped about half of its losses.
It seems likely that this is the culmination of the market’s rotation out of growth stocks. Basically, many growth stocks and specifically the speculative and frothy ones have been trending lower since mid-February, while other indices like the Dow Jones and S&P 500 have been making higher highs.
Some of the catalysts for the market’s selloff were concerns about rising inflation readings, the S&P 500’s failed breakout above 4,200, and some tax-induced selling with Tax Day coming up.
This was the first meaningful sell-off in the S&P 500 that was broad-based since March. It also resulted in some extreme readings in the Vix and short-term sentiment indicators that can offer good entry points in bull markets.
Buying dips in assets with improving fundamentals is one recipe for outperformance. This is especially true when the dip is due to reasons that have nothing to do with a company’s fundamentals.
Here are 3 such stocks:
Lennar is one of the largest homebuilders in North America as it currently accounts for 18% of new homes built in the country. Homebuilding is set to rise given the low supply of housing. Further, household formation is likely to improve if the economy keeps growing and wages keep rising.
In addition to homebuilding, Lennar also offers residential mortgage financing, title insurance, and closing services for home buyers and others. Its strong financial results in the recent quarter also are proof of strength in the housing market as revenue increased by 18%, and net income was up 151%. Equally important, the company cited higher costs but said it was able to pass them onto customers which ensures that margins haven’t been compromised. It also issued a strong forecast above expectations and has beat earnings for 4 straight quarters.
It’s no surprise that LEN is rated a B, which equates to a BUY in our POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting. B-rated stocks have an average annual performance of 19.7% which compares favorably to the S&P 500’s 7.3% return.
The POWR Ratings also evaluates stocks by components including Growth, Value, Momentum, Stability, Sentiment, Quality, and Industry. To see them, please click here.
TROX is a vertically integrated manufacturer of Titanium dioxide. This is an important ingredient in white paint, so the company’s fortunes are tied to the housing market.
When house prices are rising, people are more likely to do renovations and repaint their interiors. TROX tends to do very well during periods of rising home prices. This is reflected in its recent performance as the stock is up 265% over the past year.
Over the last 12 months, it’s increased its EPS by 920%, and analysts are forecasting 28% EPS growth over the next 12 months. Despite this remarkable performance, shares are quite reasonably priced with a forward PE of 10.
The POWR Ratings are quite constructive on the stock as it is rated a B which translates to a Buy rating. This isn’t surprising considering the stock’s rare combination of value and growth. Wall Street analysts are also quite bullish on the stock as it has an average price target of $27.75 which implies 20% more upside.
Whirlpool Corporation (WHR)
WHR is one of the world’s largest manufacturers of home appliances. The company has operations all over the world, and some of its most well-known products include refrigerators, laundry appliances, cooking, and other small domestic appliances, and dishwasher appliances.
The company has been doing quite well as of late. Due to the coronavirus, spending on appliances increased due to the stimulus and many other outlets for spending being unavailable. Additionally, when people change homes, they tend to upgrade their appliances as well.
This is reflected in its most recent quarter as operating income increased 24% over the previous year. It also continued a streak of topping estimates for the fourth straight quarter. Its forecast calls for EPS and revenue to increase 175.8% and 41.5%, respectively. The company is using some of its cash flow to buy back shares.
WHR’s POWR Ratings reflect this promising outlook. The stock has an overall A rating, which equates to Strong Buy in our POWR Ratings system. Many analysts have been predicting a major upgrade cycle for appliances given the steady improvements of newer generations in addition to the average age of appliances reaching 9 years old.
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This article was written by Jaimini Desai, Chief Growth Strategist for StockNews.com. Jaimini has been dialed into the hottest trends in investing:
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LEN shares were trading at $99.73 per share on Friday afternoon, up $1.02 (+1.03%). Year-to-date, LEN has gained 31.53%, versus a 11.86% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...
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