5 Top-Rated Housing Stocks to Buy Now
Homebuilding stocks have been red-hot in recent years, and an early 2022 pullback has a number of solid names priced at a discount.
Housing stocks have outperformed most other industries over the course of the pandemic, even as homebuilders face headwinds from ongoing supply-chain issues and rising input costs.
And while homebuilder stocks have taken their fare share of lumps in early 2022 along with the broader market, this may have created an opportunity to pick up some solid plays at more attractive prices.
You see, even with the challenges facing the housing industry, earnings have continued to grow at an impressive pace as buyers took advantage of record-low mortgage rates and were able to absorb higher prices. As such, margins weren't negatively impacted.
Additionally, there are positive fundamentals on the demand side, with household balance sheets in strong shape and millennials entering their 30s and 40s when home ownership rates tend to rise. Another supportive factor is the low inventory of homes, which has led to bidding wars and rising rates of new construction.
And yes, higher mortgage rates are another hurdle the housing industry is facing in 2022. Mortgage rates are rising from historically low levels as the Federal Reserve prepares to kick-off its rate-tightening cycle and this is in part what led to a recent pullback in homebuilder stocks.
However, this selloff has likely created a window for opportunistic investors to get in at a discount. The supply/demand dynamic remains bullish for homebuilders, as inventories are close to multi-year lows. Plus, valuations for most housing stocks are low, indicating that some deceleration is already discounted.
But which homebuilders are best for investors right now? To find out, we took a look at some of the top-rated stocks in the Stock News POWR Ratings universe. This stock-rating tool monitors more than a hundred different factors – from balance-sheet strength to analyst outlooks to valuations – to determine which names are positioned to outperform the market.
Here are five of the best housing stocks to buy now, according to the pros.
Data is as of Feb. 22.
PulteGroup
- Market value: $11.5 billion
- POWR Ratings overall rating: B (Buy)
PulteGroup (PHM, $46.23) is a homebuilder in the U.S. that primarily operates in Southern and Western states. Its various home designs include single-family detached, townhouses, condominiums and duplexes. Some of its most well-known brands are Centex, Pulte Homes, Del Webb, DiVosta Homes, American West and John Wieland Homes and Neighborhoods. Each segment targets different demographics including first-time buyers, retirees and luxury buyers.
"Given the country's resilient economy, outstanding job market, rising wages and an ongoing desire for homeownership, we anticipate the strong buyer demand we realized in 2021 to continue in the year ahead," PulteGroup CEO Ryan Marshall said during the company's fourth-quarter 2021 earnings call.
Marshall added that although global supply-chain issues continue to disrupt the housing industry, PHM's "size, growing community count and an available inventory of new homes have us well-positioned to grow our business in 2022 while continuing to deliver exceptional returns."
The homebuilder concluded 2021 with full-year earnings per share (EPS) of $7.44 and $13.9 billion in revenue. This was a 43% year-over-year increase in EPS and a 26% jump in revenue. For 2022, analysts are forecasting $10.25 in EPS and $16.6 billion in revenue, which equates to 38% and 19% year-over-year growth, respectively.
PulteGroupe also increased its share buyback program by $1 billion of shares, which comes out to 8.5% of the total float. This will likely provide a nice boost to EPS. Another positive is the homebuilder's fourth-quarter backlog grew by 18% year-over-year to $9.9 billion. Gross margins also continue to expand, reaching 26.8% at the end of 2021 – an improvement on both an annual and quarterly basis.
PHM has an overall B (Buy) rating in the POWR Ratings system. Among the reasons is its double-digit sales and earnings growth. In addition, PulteGroup boasts a Value Grade of B, indicating the stock can be bought at a bargain. Indeed, the shares are trading at 4.7 times 2022 earnings estimate, which is significantly below the market average.
It's also one of the most well-liked housing stocks on Wall Street, as evidenced by its Sentiment grade of B. Seven out of nine analysts covering PHM have it rated as a Buy. Check out the complete POWR Ratings for PHM, including a deeper look into its component scores.
Cavco Industries
- Market value: $2.5 billion
- POWR Ratings overall rating: B (Buy)
Cavco Industries (CVCO, $272.21) is a leading designer and builder of manufactured homes, modular homes, commercial buildings, park model recreational vehicles (RVs) and vacation cabins. The company operates 26 homebuilding production lines across the nation, and some of its most widely recognized brands are Cavco, Fleetwood, Palm Harbor, Nationwide, Fairmont, Friendship, Chariot Eagle, Destiny, Commodore, Colony, Pennwest, R-Anell, Manorwood and MidCountry.
CVCO also has an insurance arm – Standard Casualty – which offers a variety of insurance products for manufactured homeowners. And its finance subsidiary, CountryPlace Mortgage, has a number of homebuyer financing options.
Pre-manufactured and modular housing are becoming increasingly popular and have to be considered a part of the solution to the housing shortage – especially as they tend to be about 30%-40% cheaper than typical homes.
Over the last 10 years, Cavco Industries shares are up over 500%, while the company's earnings went from 43 cents per share in fiscal 2011 to $8.34 per share in fiscal 2021. Analysts are forecasting 2022 EPS of $20.36 for fiscal 2022, a 144% increase from the year prior.
Wall Street has underestimated CVCO's potential as one of the best housing stocks too, as the company has beat earnings expectations for seven straight quarters, with last quarter seeing a 75% beat. As a result, at least three analysts upgraded their earnings estimates for the current quarter, fiscal 2022 and fiscal 2023 after Cavco's most recent report.
This promising outlook is reflected in the stock's Growth Grade of B – a part of its overall B (Buy) grade in the POWR Ratings system. Adding to this, the company has compounded revenue growth of 33% over the last five years, and it's expected to continue growing revenue at a double-digit rate over the next five years due to the shortage of housing.
What's more, B-rated stocks in the proprietary rating system have returned 20.1%, on average, annually since 1999, which compares favorably to the S&P 500's annual average gain of 8.0% over that same time frame. Check out CVCO's complete POWR Ratings.
Tri Pointe Homes
- Market value: $2.3 billion
- POWR Ratings overall rating: B (Buy)
Tri Pointe Homes (TPH, $21.00) designs, builds and sells single-family attached and detached homes. The company's homebuilding operation consists of six segments: Maracay Homes, Pardee Homes, Quadrant Homes, Trendmaker Homes, TRI Pointe Homes and Winchester Homes. It also provides financial services such as mortgage financing.
The company operates in 10 states and is known for its premium homes and communities, as well as innovative, modern designs at multiple price points. As of December 2020, the company controlled 36,000 lots. TPH certainly benefited from strength in home prices and the boom in demand that followed the pandemic, as the company's net income went from $118 million in fiscal 2019 to $469.3 million in 2021, while profit margins expanded to 16.3% from 9.4%.
Additionally, TPH's backlog continues to grow, reaching $2.2 billion as of Q4 2021, up 17% from the year prior. The company also has ambitious growth plans on the homebuilding side. By the end of 2022, it plans to increase its number of active communities by 40% and increase deliveries by nearly 8% at the midpoint.
For 2022, analysts are forecasting that Tri Pointe Homes will have EPS of $4.55 and $4.3 billion in revenue, representing a 14% and 8.6% increase, respectively. TPH could exceed these estimates if demand surprises to the upside or if cost pressures subside.
TPH is another one of the B-rated housing stocks in the POWR Ratings universe, translating to a Buy. This is due in part to its strong fundamentals, which include a solid balance sheet, low levels of debt and $1.2 billion in liquidity. As such, Tri Pointe Homes boasts a Quality Grade of B.
The stock also has a Value Grade of B thanks to its below-market forward price-to-earnings (P/E) ratio of 4.2 and its price-to-free cash flow (FCF) ratio of 5.9. Such strong cash generation is a sign of a great business and often a leading indicator of share buybacks or dividend payouts. Get the full scoop on TPH's POWR Ratings scores.
NVR
- Market value: $16.2 billion
- POWR Ratings overall rating: B (Buy)
NVR (NVR, $4,792.79) is primarily engaged in constructing and selling single-family detached homes, townhomes, and condominium buildings. Its most well-known brand is Ryan Homes. The company operates 34 metropolitan areas across 14 states, including New York, Virginia, Ohio, Florida and Tennessee. It also provides mortgage-related services to homebuyers.
NVR has a different business model than other homebuilders as it doesn't own any land. Instead, the company purchases options to build homes on land and only exercises these options when there is a demand to build. This means that it's a pure play as far as homebuilder stocks go.
The firm is also regionally focused which translates into higher margins and greater efficiencies than homebuilders whose operations are spread out over multiple regions. The attractiveness of its business model is most evident during downturns, as NVR was profitable even during the housing crash and Great Recession.
Currently, NVR has higher margins than its peers, faster turnover in terms of inventory and much lower levels of debt. NVR sources a large portion of its own materials with its pre-fabrication factories for building materials which are located close to the company's communities. These have helped it navigate the recent supply-chain issues that have slowed deliveries for many in the housing industry.
NVR earns an overall B (Buy) grade in the POWR Ratings system. Particularly appealing about the firm is its solid growth potential and below-average valuation.
Analysts are expecting earnings to grow 40% in fiscal 2022 and revenue to improve 19.6%. And both metrics are expected to increase nearly 9% in fiscal 2023. NVR also has a forward P/E of 10 which is nearly half of the S&P 500's forward P/E of 19.7. See NVR's complete POWR Ratings breakdown.
Hovnanian Enterprises
- Market value: $474.7 million
- POWR Ratings overall rating: B (Buy)
Residential homebuilder Hovnanian Enterprises (HOV, $84.55) was founded in 1959. The company specializes in building and selling single-family detached homes, attached townhomes and condominiums, urban infill and active lifestyle homes. It operates through two segments: homebuilding and financial services.
Currently, the company operates in 14 states and has a variety of homes for sale in 124 different residential communities. HOV has skyrocketed since the March 2020 market bottom, with the stock up about 1,300%, while operating income has climbed from around $100 million to $265 million on a trailing 12-month basis.
"Our strong results during fiscal 2021 resulted in our key credit metrics improving substantially," CEO Ara Hovnanian said in regard to the company's recent performance and outlook. "We lowered our total debt to adjusted EBITDA [earnings before interest, taxes, depreciation and amortization] ratio to 3.8 times at the end of fiscal 2021 compared with 6.7 times at the end of the previous year. Our pretax income increased substantially to almost $200 million in fiscal 2021."
Looking ahead, HOV expects earnings per share to arrive between $26.50 and $32.00 in fiscal 2022 and anticipates it will more than double shareholders' equity by fiscal year-end.
"Given that we are entering fiscal 2022 with over half of our revenue guidance in backlog, combined with our strong sales pace and gross margins, we look forward to an extraordinarily strong new year," Hovnanian added.
Like its peers in the housing industry, HOV has been able to offset higher costs by raising prices. Thus, Hovnanian's gross margins are now above 19%, while they were down in the 14%-15% range pre-pandemic. Further, many of these cost pressures are already subsiding based on comments from management teams that see challenges persisting into 2023, although the worst has certainly passed.
HOV has earned a B (Buy) grade in the POWR Ratings system, due in part to these operational improvements and favorable sector conditions. Hovnanian may be particularly appealing to value investors, given its Value Grade of A. The stock is currently trading at 2.2 times forward earnings, which is significantly cheaper than the S&P 500's forward P/E ratio of 19.7.
The homebuilder also has a Momentum Grade of B. This is consistent with its outperformance over the last two years, and its status as one of the higher-beta housing stocks. See more of HOV's POWR Ratings.
