Value Investors: Buy Housing Now – Investment Ideas

Housing stocks were the darling of 2012 and started off 2013 on a hot streak.

But in May, the stocks peaked and it’s been downhill ever since even though many of the homebuilders have reported better than expected earnings and the year over year earnings growth is expected to be phenomenal.

What gives?

The homebuilders are a classic case of what was once hot is now not.

But the sell off has created an opportunity for the savvy value investor.

In May, many were concerned about excessive valuations of the homebuilders as they hit new highs, but that’s not the case now that the stocks have plunged. Far from it.

There’s plenty of value to be found in many of the homebuilders. Not only that, you can get double digit earnings growth and an attractive Zacks Rank.

If you loved the homebuilder stocks as they were going up just a few months ago, now’s your chance to get them while they’re cheap.

Homebuilders are Confident

If anything, the fundamentals in the sector have actually improved since the stocks peaked in the spring.

On Aug 15, the Homebuilders Confidence Index hit an 8-year high as it rose to 59 from 56 in July. The homebuilders haven’t been this confident since the housing boom and bubble years.

They have a reason to be confident. Housing inventories, both new and existing, are running a multi-year lows in most major markets yet low interest rates and record stock prices, which have boosted confidence, have spurred buyers.

The builders are buying land again and have pricing power in many states.

One fly in the ointment may be rising mortgage rates, but even at 5%, mortgage rates would still be near all-time lows. Homebuyers have been in hibernation for 7 years. 2013 has been the first year where buyers have appeared and the demand has not been temporary.

The homebuilders believe the momentum will continue into 2014. The pieces are in place. We’re in the early stages of the housing recovery.

There will be hiccups. But now is a chance to get some of the homebuilders at incredible prices.

3 Best Values in Housing

  1. M.D.C. Holdings Inc.
  2. Ryland Group Inc.
  3. Meritage Homes

1. M.D.C. Holdings, Inc. (MDC)

M.D.C. Holdings is one of the larger U.S. homebuilders with 140 communities in many of the hot major metropolitan markets such as Washington DC, Phoenix, Las Vegas, the Bay Area and Southern California.

On July 30, it reported second quarter results which saw revenue up 56%. The number of homes delivered rose 37% to 1183 as the average selling price jumped 14% to $338,400. Monthly absorption was at the highest level since 2006.

Forward P/E = 11.3

P/B = 1.2

P/S = 0.9

2013 expected earnings growth of 108%

Zacks Rank #3 (Hold)

The string of big earnings surprises over the last several quarters tells the tale of the housing, and homebuilder stock, turnaround over the last 5 years.

2. Ryland Group Inc. (RYL)

Ryland is one of the most recognizable homebuilders in the country. It operates in 14 states.

On July 24, it reported second quarter results where revenue soared 67.8% year over year. New orders rose 56.7% to 2,191 from 1,398 in the second quarter of last year. The average closing price jumped 13% to $287,000.

For the first six months of 2013, gross profit margin was 20%, up from 18.2% for the same period in 2012.

Housing gross profit margin was 20.0 percent for the six months ended June 30, 2013, compared to 18.2 percent for the six months ended June 30, 2012.

Forward P/E = 5.2

P/B = 2.0

P/S = 1.2

2013 expected earnings growth of 558%

Zacks Rank #2 (Buy)

Ryland has also put together a nice earnings surprise streak.

3. Meritage Homes (MTH)

Meritage Homes is the 9th largest public homebuilder in the United States. It concentrates in the West, South and the Southeastern U.S. As of June 30, it had 165 actively selling communities.

Like its competitors, the second quarter was a strong one for Meritage. It reported second quarter results on July 24 which saw home closing revenue jump 55% year over year. The average sale price rose 23% to $350,000, the highest in 8 years.

Gross margin rose to 21.5% from 18.5% in the second quarter of a year ago due to both home price appreciation and the cutting of costs.

Forward P/E = 14.6

P/B = 2.0

P/S = 1.1

2013 expected earnings growth of 117%

Zacks Rank #2 (Buy)

The analysts have been behind on the housing recovery story as Meritage has put together 5 big beats in a row.

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Tracey Ryniec is the Value Stock Strategist for She is also the Editor of the Turnaround Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec.

MDC HLDGS (MDC): Free Stock Analysis Report
MERITAGE HOMES (MTH): Free Stock Analysis Report
RYLAND GRP INC (RYL): Free Stock Analysis Report
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