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10 Stocks Leading the Housing Recovery

Home Construction
stangls
Home Construction

The much-anticipated rebound in the new-home market may be here with this spring’s selling season. And that has investors diving into these highly cyclical stocks after years of decline.

Indicative of that, the S&P 1500 Homebuilder Index is up 35 percent this year, versus the S&P 500 index’s 11.7 percent gain.

And that jump has come just months after the close of a year in which only 304,000 new homes were sold, the lowest on record that go back to 1963, according to the Commerce Department.

The tenuousness of a potential rebound came through in a report Monday from the National Association of Home Builders as its measure of confidence of new-home builders remained unchanged in March from February despite a number of economic positives in the past few weeks. But the current level is the highest since June 2007 and over 50 builders reported “good” market conditions, which hasn't been the case since April 2006.

Still, buyers are skittish as any form of bad economic news is likely to scare them off. And many markets remain clogged with unprocessed foreclosures, and the new borrowing standards are tough, especially for first-time buyers. Those issues are somewhat offset by low interest rates.

S&P Capital IQ analysts said in a recent research note that “most publicly traded builders are in a stable, competitive position after reducing costs, retiring debt and increasing cash positions. However, we think the housing market will improve slowly in the next year as it will take time before buyers’ confidence and the job market progress enough to support a more favorable view of home ownership.”

Here are 10 stocks expected to benefit from the homebuilding industry’s rebound in inverse order of analysts’ “buy” ratings:

10. Masco

Company profile: Masco, with a market value of $5 billion, is one of the largest housing-related manufacturers with a product line that includes plumbing products, cabinets, paint, and windows, sold under the brand names Delta Faucet, KraftMaid Cabinetry, and Behr paint.

Investor takeaway: Its shares are up 28 percent this year and have a three-year, average annual return of 40 percent. Analysts give its shares one “buy” rating, one “buy/hold,” 13 “holds,” and three “weak holds,” according to a survey of analysts by S&P. Those analysts expect it to earn 25 cents per share this year, growing to 63 cents in 2013. S&P says: “Sales were very weak over the past five years, on U.S. housing market woes, much slower big-ticket consumer spending, and economic concerns in Europe. Yet, on what now seems to be a stabilization of housing, we see a modest sales revival in coming periods.”

9. USG

Company profile: USG, with a market value of $2 billion, is a manufacturer and distributor of a wide range of building materials, including gypsum wallboard and ceilings, and tile and flooring.

Investor takeaway: Its shares are up 70 percent this year, 103 percent in the past three months, and have a three-year, average annual return of 44 percent. Analysts give its shares two “buy” ratings, three “buy/holds,” nine “holds” and two “weak holds,” according to a survey of analysts by S&P. Despite the huge share-price run-up, S&P still has it rated “buy,” and calls it undervalued since it has “solid long-term prospects,” based on the improving industry outlook, a recent restructuring of its balance sheet, and its over $800 million of cash and equivalents at year-end.

8. Toll Brothers

Company profile: Toll Brothers, with a market value of $4 billion, is a builder of high-end homes.

Investor takeaway: Its shares are up 21 percent this year and have a three-year, average annual return of 15 percent. Analysts give its shares two “buy” ratings, six “buy/holds,” 13 “holds,” and one “sell,” according to a survey of analysts by S&P. It's expected to earn 30 cents per share this year and 73 cents in 2013. Morningstar analysts say: “Toll is one of the more attractive businesses in homebuilding,” due to its “well-managed indebtedness, lean operations, and disciplined adherence to the luxury market (which will) make it a likely big winner once volumes normalize.”

7. PulteGroup

Company profile: PulteGroup, with a market value of one of $3.6 billion, is one of the country’s largest residential builders. It sells homes targeting first-time, move-up, and active adult buyers through its Centex, Pulte, and Del Webb brands.

Investor takeaway: Its shares are up 47 percent this year and 61 percent over the past three months. But the long-term record is miserable, with a five-year average annual loss of 18 percent. Analysts give its shares two “buy” ratings, two “buy/holds,” and 17 “holds,” according to a survey of analysts by S&P, which has it rated “hold.” But the ratings firm says that “after a sales decline of 9.5 percent in 2011 and taking into account a contract backlog of $1.1 billion, we forecast that 2012 revenues will increase 4.6 percent in an expected housing market recovery.” Analysts expect it to earn 20 cents per share this year, growing to 57 cents in 2013.

6. Fastenal

Company profile: Fastenal, with a market value of $15 billion, provides building industry and industrial customers with all types of fasteners such as nails and screws, as well as general-purpose maintenance, repair, and operations items. With more than 2,600 store and distribution locations, it generated $2.8 billion in revenue in 2011.

Investor takeaway: Its shares are up 20 percent this year and have a three-year, average annual return of 57 percent. It has a 15-year average annual return of 18 percent, one of the best records you will find. Analysts give its shares three “buy” ratings, seven “holds,” one “weak hold,” and one “sell,” according to a survey of analysts by S&P. For fiscal year 2012, analysts estimate it will earn $1.48 per share and that that will grow by 19 percent to $1.76 in 2013.

5. KB Home

Company profile: KB Home, with a market value of $926 million, is a builder of affordable homes targeting first-time, move-up, and active adult buyers.

Investor takeaway: Its shares are up a huge 91 percent this year, but its five-year record is an average annual loss of 20 percent. Analysts give its shares three “buy/hold” ratings, 15 “holds,” two “weak holds,” and one “sell,” according to a survey of analysts by S&P. Analysts expect it to lose 43 cents per share this year, but turn it around to 30 cents profit per share in 2013.

4. Beazer Homes

Company profile: Beazer Homes USA, with a market value of $281 million, is one of the nation’s 10-largest home builders.

Investor takeaway: Its shares are up 48 percent this year and have a three-year, average annual return of 94 percent. Analysts give its shares three “buy” ratings, three “holds,” two “weak hold,” and one “sell,” according to a survey of analysts by S&P. Analysts estimate it will lose $1.26 per share this year and lose $1.08 in 2013. S&P which has it rated “hold,” forecasts a 22 percent sales increase this year, and 13 percent sales growth next year, based on a “modest” housing recovery. It adds that the company is cautiously “making progress in land acquisitions for new communities that are required for future growth.”

3. D.R. Horton

Company profile: D.R. Horton, with a market value of $5 billion, is one of the largest U.S. homebuilders, with $3.6 billion in revenue last year.

Investor takeaway: Its shares are up 27 percent this year and have a three-year, average annual return of 27 percent. Analysts give its shares four “buy” ratings, three “buy/holds,” 13 “holds,” and one “sell,” according to a survey of analysts by S&P. It’s expected to earn 51 cents per share this year and 83 cents next year. S&P has it rated “hold,” and notes that the company is conservatively run and has $1 billion in cash on its balance sheet. “We believe the company can be opportunistic in reducing debt and making select new land acquisitions to expand new home communities,” noted S&P analysts.

2. Lennar

Company profile: Lennar, with a market value of $5 billion, builds and sells new homes targeted at value-oriented, first-time, and move-up purchasers in 14 states.

Investor takeaway: Its shares are up 35 percent this year and have a three-year, average annual return of 51 percent. Analysts give its shares four “buy” ratings, seven “buy/holds,” and 13 “holds,” according to a survey of analysts by S&P. Those same analysts expect it to earn 77 cents per share this year, and $1.30 per share next year.

1. United Rentals

Company profile: United Rentals, with a market value of $2.6 billion, rents and sells construction equipment, ranging from heavy machinery to hand tools, at more than 700 locations in the U.S. and Canada.

Investor takeaway: Its shares are up 44 percent this year and have a three-year, average annual return of 130 percent. Analysts give its shares nine “buy” ratings, three “buy/holds,” and one “hold,” according to a survey of analysts by S&P. S&P has a “strong buy” rating on its shares and says, “We see revenues rising 18 percent in 2012 after a 17 percent increase in 2011. We look for (the company) to benefit from higher rental rates and improved utilization stemming from better rental demand,” because cash-strapped contractors have aging equipment fleets and not enough on hand to keep up with expected new projects.

Additonal News: US Housing Starts Dip; Permits Near 3 1/2-Year High

Additional Views: 3 Housing Stocks for a 2012 Rebound

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