One of the most remarkable developments of the past year has been strength in the housing market. Going into the coronavirus, conditions were favorable due to low rates and low inventory. However, the pandemic resulted in rates moving even lower and a surge in demand as people were eager to move out of cities and into suburbs and rural areas. Of course, a contributing factor was the increase in remote work which gave people more flexibility in choosing a location.
As a result, it’s not surprising that the S&P CoreLogic Case-Schiller 20 City Home Price Index rose by 12% over the past 15 months to reach, new all-time highs. This is confirmed by anecdotal evidence as there are bidding wars for homes all across the country. This strength is also reflected in homebuilders, as the SPDR S&P Homebuilders ETF (XHB) which is up more than 200% since the March 2020 stock market bottom.
However, since early May, housing stocks have weakened as XHB is down about 12% since its high on May 10. While there are some indications that the housing market’s momentum is slowing, longer-term fundamentals remain supportive. Simply put, the housing market will continue to expand albeit at a slower pace than the prior year. Therefore, investors should use recent weakness as a buying opportunity and target high-quality stocks such as Hovnanian Enterprises (HOV), Tempur Sealy International (TPX), and Industrie Natuzzi (NTZ).
Hovnanian Enterprises (HOV)
HOV builds, markets, and sells single-family homes, townhouses, condominiums, and apartment complexes. The past year has obviously been beneficial for homebuilders as there has been an increase in new construction. Longer-term, the only solution to America’s housing situation is to build more houses so the supply crunch is alleviated.
One potential challenge is the increase in a variety of inputs such as labor, lumber, and building materials. However, HOV’s earnings results show that so far the company has been able to pass on these higher costs to customers, as margins have remained strong. And, in recent weeks, there has been some relief as lumber prices and other building materials’ costs have declined.
This is evident in its Q1 earnings report which showed a 31% increase in revenues, topping expectations by a healthy amount. Backlogs grew to $1.8 billion, an 81% increase. The company was able to use these proceeds to retire a significant portion of its high-interest debt.
The POWR Ratings are also bullish on HOV as it is rated a B which translates to a Buy. B-rated stocks have an average annual performance of 19.7%. What’s even more impressive its A grade for Value. Typically, companies with strong earnings growth have weaker value scores. However, HOV has a very low price-to-earnings ratio compared to the broader market and its peers which means the stock could be fueled by earnings growth and multiple expansion. To see more of HOV’s component grades, click here.
Tempur Sealy (TPX)
TPX manufactures and sells bedding including mattresses, pillows, covers, sheets, and cushions. It operates two segments: North America and International with various brands such as TEMPUR, Tempur-Pedic, Sealy, Sealy Posturepedic, and Stearns & Foster.
When people change homes, they typically upgrade their mattresses. Thus, mattress sales have been strong along with the housing market. Sales should remain strong given the favorable dynamics of the housing market and strong levels of consumer spending.
In its last quarter, revenue increased 27% year-over-year to $1.04 billion. Net income was up 118.6% from the same period last year to $130.50 million. And its EPS came in at $0.64 for the quarter, a 129% gain from last year.
TPX’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to a Buy in the POWR Ratings system. It also has an A grade for Growth which is consistent with its market-leading revenue and sales growth. To see more of TPX’s component grades, click here.
Industrie Natuzzi (NTZ)
NTZ is one of the most well-known furniture brands in the world and is renown for its design and quality. It continues to be led by Pasquale Natuzzi who founded the company in 1959. It’s primary focus is on the design, manufacture, and marketing of leather and fabric upholstered furniture through its own and franchised stores worldwide. The company operates through two segments: the Natuzzi brand and Softaly which is a private label brand.
NTZ has been one of the best performers in the entire market over the past year as spending on furniture exploded amid the pandemic. Of course, a strong economy and housing market also mean that people will continue to spend on upgrading the interiors of their homes.
In its last quarter, NTZ reported a 23% increase in sales. Even more impressive was operating profits reaching its highest level in 5 years and an increase in margins as the company was able to raise prices. The company experienced double-digit sales growth in all regions, and its order backlog also increased by a substantial amount. Most important, the company was able to turn a profit in the quarter and expects to be profitable on a full-year basis.
Given these improvements, it’s not surprising that NTZ is rated a B which translates to a Buy in the POWR Ratings system. It also has a B for Growth which is consistent with its increased pricing power and orders. Given the positive fundamentals of the housing market, it’s not surprising that NTZ’s Industry – Home Improvement & Goods – has an A rating. To see more of NTZ’s component grades, click here.
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TPX shares were unchanged in after-hours trading Wednesday. Year-to-date, TPX has gained 41.48%, versus a 13.27% 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 POWR Growth newsletter. Learn more about Jaimini’s background, along with links to his most recent articles. More...
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