Spurred by lower mortgage rates, the U.S. economy reported a 12.3% increase in housing starts to a seasonally adjusted annual rate of 1.364 million units in August, topping consensus estimates by 114,000 units. The reading was the highest since 2007.
Housing starts are one of the most important indicators of economic strength. The increase suggests more people are purchasing new homes, which usually characterizes a strong economy.
As a result of these trends, investors may want to increase their exposure to homebuilders. The Federal Reserve lowered the target range for the federal funds rate by a quarter of a percentage point to 1.75% to 2% on Wednesday, marking the second rate cut since the financial crisis.
The outlook for the residential construction industry is positive as more interest rate cuts are sure to follow, supporting mortgage applications for the purchase of new homes.Â
Thus, the following residential construction companies may represent compelling opportunities as the Peter Lynch value suggests they are cheap and Wall Street has issued positive recommendation ratings ranging from hold to overweight.
The first company is Toll Brothers Inc. (TOL, Financial). Shares closed at $39.19 on Wednesday for a market capitalization of $5.5 billion. The stock has gained 19% year to date, almost in line with the S&P 500 Index.
The stock has a 52-week range of $28.68 to $41.70.
Toll Brothers has paid quarterly dividends since April 28, 2017. Currently, the Horsham, Pennsylvania-based homebuilder pays a quaterly dividend of 11 cents per common share, producing a forward dividend yield of 1.08% versus the industry median of 2.93% and the S&P 500 Index’s yield 1.87% as of Wednesday.
The Peter Lynch chart suggests the stock is cheap.
Sell-side analysts issued a hold recommendation rating for shares of Toll Brothers with an average target price of $38.17.
In addition, GuruFocus assigned a rating of 5.1 out of 10 for the company's financial strength and a 9 out of 10 rating for its profitability and growth.
The second company is TRI Pointe Group Inc. (TPH, Financial). Shares closed at $15.06 on Wednesday for a market capitalization of $2.14 billion. The stock has climbed 37.8% year to date, outperforming the S&P 500 Index by nearly 18%.
The stock has a 52-week range of $10.37 to $15.18.
TRI Pointe Group does not pay a dividend.
The Peter Lynch chart suggests the stock is cheap.
Sell-side analysts issued a hold recommendation rating for shares of TRI Pointe Group with an average target price of $14.43.
Further, GuruFocus assigned a rating of 5 out of 10 for the company's financial strength and a 7 out of 10 rating for its profitability and growth.
The third company is Taylor Morrison Home Corp. (TMHC, Financial). Share closed at $25.04 on Wednesday for a market capitalization of $2.64 billion. The stock has advanced 57.5% year to date, outperforming the S&P 500 by 37.7%.
The stock has a 52-week range of $14.73 to $25.25.
Taylor Morrison Home does not pay a dividend.
The Peter Lynch chart indicates the stock is cheap.
Sell-side analysts issued an overweight recommendation rating for shares of Taylor Morrison with an average target price of $26.29. As a result, the stock is expected to outperform most of its competitors.
In addition, GuruFocus assigned a rating of 4.4 out of 10 for the company's financial strength and an 8 out of 10 rating for its profitability and growth.
Disclosure: I have no positions in any securities mentioned.
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