What are we looking for?
Well-valued U.S. home builders with an opportunity to grow in 2015.
The U.S. housing market has continued to recover following the housing bust of five years ago. According to the U.S. Census Department, housing starts in November were 1.03 million – more than double the number of just three years ago. With U.S. mortgage rates at historic lows and the Federal Reserve poised to keep interest rates low for a considerable time, U.S. home builders should see strong growth in their businesses during the coming year.
The screen
We will be using Recognia Strategy Builder to search for large cap U.S. home building stocks with reasonable valuations and strong operating models.
We begin by setting a minimum market cap threshold of $2-billion (U.S.). Unlike the Canadian market, the U.S. home building market has numerous multibillion dollar players. These companies should be best able to scale their businesses to take advantage of an improving economy.
Next, we will use the forward price-to-earnings ratio to select home building stocks with reasonable valuations. Forward P/E uses the mean of analyst estimates for earnings over the coming year and therefore better reflects an improving business climate as part of the valuation estimate. We will select only companies with forward P/E ratios of 20 or less.
Finally, we will choose only companies with efficient operations as measured by their operating margins. Operating margin is a measure of how much profit a company makes for each dollar of revenue. We will select only companies with operating margins of 10 per cent or more. These companies should be best able to turn increased home starts into improved earnings.
More about Recognia
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What did we find?
Taylor Morrison Home Corp. ranks first on our list and made the news this past week with a deal to sell its Canadian division, Monarch Corp., to Mattamy Homes. Taylor Morrison focuses on home building in the fast growing U.S. southern states such as California, Arizona and Florida. With a forward P/E of just 9.0 and an operating margin of 12.7 per cent, Taylor Morrison looks well valued compared to its peers.
Miami-based Lennar Corp. is the largest home builder in the United States by market cap. The company operates in 17 states and posted a seven-year high in its stock price in November on the back of strong financial results. Lennar has a forward P/E ratio of 16.8 and an operating margin of 12.2 per cent.
PulteGroup posted very good third-quarter results in October, with earnings topping analyst expectations and an increasing backlog of unbuilt homes. The stock made a new 52-week high in early December on news of an increased land investment goal for 2015. The stock has a forward P/E of 19.5 and an operating margin of 11.7 per cent.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.