The construction sector is doing well at this time, mainly due to continued strength in residential housing.
And residential housing is made up of two parts, existing houses and new houses. Existing homes are by far the larger of the two segments, so the numbers should ideally be read together, at least as an indicator of demand.
So we see that in May, existing home sales (estimated by the National Association of Realtors) totaled 5.80 million, while new home sales (estimated by the Census Bureau) totaled only 769K. Of course, new homes cost more (median selling price of $ 374,400 in May) than existing homes (median selling price of $ 350,300), which is probably a major reason for the disparity.
Prices have increased over the past year due to rising input costs and low inventories, which in turn are the result of favorable demographics and pandemic-induced purchases. But over the past two weeks, lumber prices have fallen as more inventory becomes available, which should be positive for the construction (new house) and repair / renovation (existing house) markets.
So right now we’re in the cycle position where rising prices push some entry-level buyers out of the market. If the stocks of new and existing homes do not increase, prices will continue to rise and more and more people will postpone their homeownership plans. And it is despite the reprieve that they get low mortgage rates.
According to the NAR, anything less than six months of supply results in price appreciation at an accelerated rate. It is not until six months of supply that the price appreciation moderates. Thus, the fact that the stock of new homes at the end of May represents 5.1 months of supply at the current level of sales indicates that prices will appreciate more before moderating.
So for a homebuilding business, this is the time when demand is very high, prices are going up and some costs are going down, which of course means that margins (and profits) should go up as well. And for the suppliers of these construction companies, now is the perfect time for business.
With that in mind, I have selected 5 stocks ranked by purchase that are either home builders themselves or suppliers in this hot market. It looks like they will generate outsized returns for investors over the next year or so. So here they are-
Lennar Corp. LEN
Lennar is engaged in the construction and sale of semi-detached and detached single-family homes as well as the purchase, development and sale of residential land directly and through unconsolidated entities in the United States.
Lennar ranked by Zacks # 1 (strong buy) belongs to the Construction Products Industry – Home Builders, which is ranked 21 out of 250+ industries, or the top 8%. Naturally, the industry ranking represents the strong prospects discussed above that companies in this industry enjoy.
The company is expected to increase its profits by 73.3% this year. Over the past month, Zacks’ consensus estimates for profit for the current year and beyond have risen 16.1% and 26.6%, respectively.
Louisiana-Pacific Corp. LPX
Louisiana-Pacific is a leading manufacturer of quality, durable engineered wood building materials, framing and siding products for new home construction, repair / renovation and exterior structures. It targets the residential, industrial and light commercial construction markets.
Zacks # 1 rated LPX is one of the Building Products – Wood industries, which is within 3% of Zacks rated industries. Timber prices had skyrocketed in recent months due to depleted stocks as fresh supplies faced supply constraints. But the situation is now normalizing with a drop in prices as a result. This is positive for sustained revenue growth.
Zacks’ consensus estimate for the company’s current year profit represents growth of 194.7%. Estimates for the current year and subsequent years have increased by 22.8% and 18.5% respectively over the past four weeks.
Quanex Building Products Corp. NX
Quanex designs and produces fenestration components such as energy efficient flexible insulating glass spacers, extruded vinyl profiles, window and door screens, and precision formed metal and wood products, as well as cabinet components. kitchen and bathroom. It also offers non-fenestration building construction components and products, such as solar panel sealants, wood flooring, moldings, vinyl decks, fences, water retention barriers. water and porch roofing components.
Zacks Rank # 2 (Buy) stock is part of the Construction Products – Miscellaneous industry, which is among the 33% of industries ranked by Zacks.
Its profits for the current year (end of October) are expected to increase by 39.5%. Over the past month, the current year’s profit estimate has increased by 18.5% while the estimate for next year has increased by 18.9%.
Potlach Corp. PCH
Potlach ranked No. 1 is another member of the lumber building products industry. The Real Estate Investment Trust (REIT) owns acres of woodland in Alabama, Arkansas, Idaho, Minnesota and Mississippi, and operates manufacturing facilities for wood products. It also has an activity of development and sale of land.
Its profits are expected to increase 169.8% this year. Estimates for 2021 and 2022 are up 30.8% and 96.3% respectively.
Weyerhaeuser Co. WY
Weyerhaeuser ranked No. 1 also belongs to the construction products industry – wood.
It is one of the leading US forest products companies with operations primarily concentrated in Southern California, Nevada, Washington, Texas, Maryland and Virginia, although it caters to a diverse customer base in the United States, Canada, Japan, Europe and other regions.
The company grows and harvests trees, builds homes, and manufactures forest products around the world, primarily for use as lumber, pulp and paper, and other wood and construction products. It offers logs, hardwoods, lumber, poles and plywood, as well as minerals, oil, gas, seeds and seedlings.
The company is expected to grow 186.8% this year. The profit estimate for the current year is up 26.8%. The 2022 estimate is up 33.5%.
There may be some concern that new home sales in May were down 5.9% from April, while existing home sales were down 0.9%. It is important to note that this should not be interpreted as soft demand. At most, it could mean that some of the home builders will not meet revenue expectations in the current quarter. But they should still beat the mile-long profit estimates for the reasons outlined above.
It’s also important to keep in mind the year-over-year growth rate, which was 9% for new homes and 45% for existing homes. So we’re talking about a much higher level of sales this year.
The main thing to watch out for is the new home inventory. Because when stocks normalize, prices will go down, causing existing home prices to fall as well. This is when we will see a further increase in demand. And if that happens as mortgage rates continue to bottom out, growth rates will accelerate even more.
Price movement since the start of the year
Image source: Zacks Investment Research
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.