As the market continues to demonstrate volatility heading into the final weeks of the year, CNBC reported on Monday that homebuilder sentiment declined to its lowest level since May 2015.
Following an eight-point drop in November, the National Association of Home Builders/Wells Fargo Housing Market Index said the metric declined four points in December to 56. While the index has plummeted nearly 20 points over the past year, it is still considered positive since it is above the threshold of 50. Regardless, consumers are reluctant to purchase new homes even after the recent pullback in mortgage rates.
Despite the decline in confidence, shares of major homebuilders rose following an initial dip on Monday morning. As a result, investors may find opportunities among homebuilders that are trading below Peter Lynch value.
A legendary investor, Lynch developed this method as a way of simplifying his investment process. With the belief good, stable companies eventually trade at 15 times their annual earnings, he set the standard at a price-earnings ratio of 15. Stocks trading below this level are often good investments since their share prices are likely to appreciate over time, creating value for shareholders. In addition, the screener looked for companies that have business predictability ranks of one or more stars.
According to the GuruFocus All-in-One Screener, top homebuilders that meet these criteria as of Dec. 17 include D.R. Horton Inc. (DHI, Financial), Lennar Corp. (LEN, Financial), PulteGroup Inc. (PHM, Financial), Toll Brothers Inc. (TOL, Financial) and M.D.C. Holdings Inc. (MDC, Financial).
D.R. Horton
The Fort Worth, Texas-based home construction company has a market cap of $13.47 billion; its shares were trading around $35.81 on Monday with a price-earnings ratio of 9.43, a price-book ratio of 1.50 and a price-sales ratio of 0.86.
The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued.
GuruFocus rated D.R. Horton’s financial strength 6 out of 10. While the company has a poor cash-debt ratio of 0.46, the Altman Z-Score of 4.77 indicates it is in good fiscal health.
The company’s profitability and growth scored an 8 out of 10 rating, boosted by operating margin expansion, good returns, a moderate Piotroski F-Score of 6, which implies conditions are stable, and a business predictability rank of one out of five stars. According to GuruFocus, companies with this rank typically see their stock prices gain an average of 1.1% per year.
Of the gurus invested in D.R. Horton, Ken Heebner (Trades, Portfolio) has the largest position with 0.26% of outstanding shares. Glenn Greenberg (Trades, Portfolio), Ruane Cunniff (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Ken Fisher (Trades, Portfolio), Caxton Associates (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and several others are also shareholders.
Lennar
The homebuilder, which is headquartered in Miami, has a $13.11 billion market cap; its shares were trading around $40.76 on Monday with a price-earnings ratio of 9.84, a price-book ratio of 0.96 and a price-sales ratio of 0.66.
According to the Peter Lynch chart, the stock is undervalued.
Lennar’s financial strength was rated 4 out of 10 by GuruFocus. Although the company has issued roughly $56.3 million in new long-term debt over the last three years, it is at a manageable level. The Altman Z-Score of 2.47, however, warns the company is under some financial pressure.
The company’s profitability and growth fared even better with an 8 out of 10 rating, driven by good margins and returns, a moderate Piotroski F-Score of 6 and a one-star business predictability rank.
With 1.57% of outstanding shares, Daniel Loeb (Trades, Portfolio) is the company’s largest guru shareholder. Other top investors include Andreas Halvorsen (Trades, Portfolio), Third Avenue Management (Trades, Portfolio), Barrow, Hanley, Mewhinney & Strauss, Glenn Greenberg (Trades, Portfolio), Smead Capital Management Inc., Fisher, Cohen and Pioneer.
PulteGroup
The Atlanta-based company has a market cap of $7.31 billion; its shares were trading around $26.02 on Monday with a price-earnings ratio of 8.72, a price-book ratio of 1.55 and a price-sales ratio of 0.75.
Based on the Peter Lynch chart, the stock appears to be undervalued.
GuruFocus rated PulteGroup’s financial strength 6 out of 10. Although the company has issued new long-term debt over the last several years, it is at manageable level as a result of adequate interest coverage. The Altman Z-Score of 3.26 also suggests the company is in good financial standing.
Boosted by an expanding operating margin and a perfect Piotroski F-Score of 9, the company’s profitability and growth scored a 9 out of 10 rating. The company also has stable returns and a one-star business predictability rank.
Dalio is the company’s largest guru shareholder with 0.37% of outstanding shares. Pioneer, Richard Snow (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Dreman also own the stock.
Toll Brothers
Based in Horsham, Pennsylvania, the company, which specializes in building luxury homes, has a $4.78 billion market cap; its shares were trading around $32.45 on Monday with a price-earnings ratio of 6.63, a price-book ratio of 1 and a price-sales ratio of 0.77.
The Peter Lynch chart shows the stock is undervalued.
Weighed down by new long-term debt, Toll Brothers’ financial strength was rated 5 out of 10 by GuruFocus. Regardless, the Altman Z-Score of 3.12 suggests the company is in good fiscal health.
Supported by margin expansion, good returns and a high Piotroski F-Score of 8, the company’s profitability and growth scored a 9 out of 10 rating. It also has a one-star business predictability rank.
Of the gurus invested in Toll Brothers, Dalio has the largest holding with 0.9% of outstanding shares. Simons, Fisher, Donald Smith (Trades, Portfolio), Pioneer, Caxton and Dreman also have positions in the stock.
M.D.C. Holdings
The Denver-based homebuilder has a market cap of $1.57 billion; its shares were trading around $27.51 on Monday with a price-earnings ratio of 8.82, a price-book ratio of 1.01 and a price-sales ratio of 0.55.
According to the Peter Lynch chart, the stock is undervalued.
GuruFocus rated M.D.C. Holdings’ financial strength 5 out of 10. Although the company has issued $193.5 million in new long-term debt over the last three years, the Altman Z-Score of 3.11 indicates it is financially secure.
Supported by an expanding operating margins and good returns, the company’s profitability and growth scored a 6 out of 10 rating. It also has a moderate Piotroski F-Score of 4 and a one-star business predictability rank.
With 0.94% of outstanding shares, Chuck Royce (Trades, Portfolio) is the company’s largest guru shareholder. Charles Brandes (Trades, Portfolio), John Buckingham (Trades, Portfolio), Fisher, Dreman and Barrow, Hanley, Mewhinney & Strauss also own the stock.
Additional homebuilders to consider
The screener also yielded Meritage Homes Corp. (MTH, Financial), M/I Homes Inc. (MHO, Financial) and William Lyon Homes (WLH, Financial) as stocks that met the requirements.
Disclosure: No positions.
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