With mortgage rates rising on the back of climbing interest rates, homebuilder sentiment in the single-family home market has tumbled to half of what it was six months ago.
The National Association of Home Builders/ Wells Fargo Housing Market Index reported on Tuesday that it fell eight points to 38 in October from the previous month. With the exception of a brief dip at the start of the Covid-19 pandemic, that is the lowest level recorded since 2012.
As anything below 50 is considered negative, NAHB Chairman Jerry Konter said high mortgage rates have “significantly weakened demand, particularly for first-time and first-generation prospective home buyers.”
“This situation is unhealthy and unsustainable,” he added.
Composed of three components, the index found that current sales conditions declined nine points to 45, while sales expectations for the next six months fell 11 points to 35 and traffic of prospective buyers decreased six points to 25.
As a result, investors may want to look for potential value opportunities among homebuilding companies that outperformed the Standard & Poor’s 500 Index by at least 10% over the past six months. As of Oct. 18, the GuruFocus All-in-One Screener, a Premium feature, found several stocks had a higher return relative to the index for the period. It also looked for companies with a business predictability rank of at least one out of five stars and a price-earnings ratio below 15.
Stocks that met these criteria were D.R. Horton Inc. (DHI, Financial), Lennar Corp. (LEN, Financial) and NVR Inc. (NVR, Financial).
In comparison, the benchmark index has retreated roughly 16.25% over the past six months.
D.R. Horton
Outperforming the index by approximately 15.79% over the past six months, D.R. Horton (DHI, Financial) has a $24.92 billion market cap; its shares were trading around $71.84 on Tuesdaywith a price-earnings ratio of 4.60, a price-book ratio of 1.38 and a price-sales ratio of 0.79.
The Arlington, Texas-based home construction company operates in 98 markets across 31 states, building mostly single-family units for a range of customers.
The GF Value Line suggests the stock, while undervalued, is a possible value trap currently based on historical ratios, past financial performance and analysts’ future earnings projections. As such, potential investors should do thorough research before making a decision.
The GF Score of 99 out of 100 indicates the company has high outperformance potential. It received a rating of 10 out of 10 for profitability, growth and momentum, a rank of 8 for GF Value and a financial strength rank of 7.
Although the company has issued new long-term debt over the past three years, it is at a manageable level. The robust Altman Z-Score of 5.21 also indicates it is in good standing. The return on invested capital also overshadows the weighted average cost of capital, so value is being created as D.R. Horton grows.
In addition to operating margin expansion, the homebuilder’s returns on equity, assets and capital outperform a majority of competitors. It also has a moderate Piotroski F-Score of 6 out of 9, which means conditions are typical of a stable company, and a four-star predictability rank. According to GuruFocus research, companies with this rank return an average of 9.8% annually over a 10-year period.
Of the gurus invested in D.R. Horton, George Soros (Trades, Portfolio) has the largest stake with 0.86% of its outstanding shares. The Smead Value Fund (Trades, Portfolio), First Eagle Investment (Trades, Portfolio), Glenn Greenberg (Trades, Portfolio) and the Parnassus Endeavor Fund (Trades, Portfolio) also have significant holdings in the stock.
Lennar
Beating the benchmark by around 16.26% over the past six months, Lennar (LEN, Financial) has a market cap of $21.75 billion; its shares were trading around $76.60 on Tuesday with a price-earnings ratio of 5.07, a price-book ratio of 0.97and a price-sales ratio of 0.70.
Headquartered in Miami, the homebuilder’s operations target first-time, move-up and active homebuyers. The company is also involved in multifamily construction.
According to the GF Value Line, the stock is significantly undervalued currently.
Further, the GF Score of 96 indicates the company has high outperformance potential on the back of 10 out of 10 ratings for growth, GF Value and momentum, a rank of 9 for profitability and a financial strength rank of 6.
While assets are building up at a faster rate than revenue is growing, the Altman Z-Score of 4.07 indicates the company is in good standing. The ROIC also eclipses the WACC, indicating good value creation is occurring. Lennar also has an expanding operating margin, strong returns that top industry peers and a moderate Piotroski F-Score of 6. Driven by consistent earnings and revenue growth, it also has a 3.5-star predictability rank. GuruFocus found companies with this rank return, on average, 9.3% annually.
With a 0.73% stake, the Smead Value Fund (Trades, Portfolio) is the company’s largest guru shareholder. Other gurus invested in the stock include Greenberg, Ken Fisher (Trades, Portfolio), Ray Dalio (Trades, Portfolio)’s Bridgewater Associates, Jeremy Grantham (Trades, Portfolio), Ron Baron (Trades, Portfolio), Ken Heebner (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies and Paul Tudor Jones (Trades, Portfolio).
NVR
Topping the S&P 500 by roughly 10.17% over the past six months, NVR (NVR, Financial) has a $13.63 billion market cap; its shares were trading around $4,152.98 on Tuesday with a price-earnings ratio of 9.98, a price-book ratio of 4.57 and a price-sales ratio of 1.57.
The Reston, Virginia-based company primarily operates on the East Coast of the U.S., building single-family homes as well as town homes and condominiums.
Based on the GF Value Line, the stock appears to be significantly undervalued currently.
Driven by ratings of 10 out of 10 for GF Value and growth, a rank of 9 for profitability and an 8 out of 10 rank for financial strength and momentum, the company’s GF Score is 97. As such, NVR has high outperformance potential.
In addition to adequate interest coverage, the company’s robust Altman Z-Score of 10.24 indicates it is in good standing. Further, the ROIC exceeds the WACC, so value is being created.
NVR also has expanding margins, strong returns and a moderate Piotroski F-Score of 6. Steady earnings and revenue growth also contributed to a 3.5-star predictability rank.
Diamond Hill Capital (Trades, Portfolio) is the company’s largest guru shareholder with 3.87% of its outstanding shares. The Smead Value Fund (Trades, Portfolio), Simons’ firm, Tom Gayner (Trades, Portfolio), Dalio’s firm, Steven Cohen (Trades, Portfolio), Grantham, Joel Greenblatt (Trades, Portfolio) and Jones also have positions in NVR.
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