What are we looking for?
Institutional ownership conviction on U.S. home-building companies.
The home-building sector has not performed well to start off the year. High building material costs, rising inflation and increasing interest rates have all had a negative impact on companies within the industry. However, the demand for new housing is very high, which provides balance and a positive outlook for the sector.
With so many changing factors, it’s difficult for the everyday investor to properly evaluate companies for investment opportunities. Institutional asset managers, on the other hand, have large teams of analysts and endless resources to make informed decisions on investments. Today we focus on how they evaluate U.S. home-building stocks.
- First, we screen for U.S.-listed home-building companies with a market capitalization of more than US$3-billion;
- Next, we screen for companies with a StarMine SmartHoldings Model score of 75 or higher.
StarMine SmartHoldings, which provides a percentile ranking, is a predictive model that accurately forecasts which stocks will see an increase or decrease in institutional ownership.
The model ranks 25 of the most important characteristics an institutional asset manager would screen for when deciding to include a company within their portfolio. These range from trailing 30-day average trading volume, which helps institutions understand whether there is enough liquidity to initiate a large trade, to enterprise-value-to-sales, which helps determine whether a company’s actual value is properly assessed in relation to its sales.
More about Refinitiv
Refinitiv, a London Stock Exchange Group business, is one of the world’s largest providers of financial market data and infrastructure, serving more than 40,000 institutions worldwide. Refinitiv provides information, insights and technology that drive innovation and performance in global financial markets, enabling the financial community to trade smarter and faster, overcome regulatory challenges, and scale intelligently.
What we found
The screen resulted in eight companies. Here are a couple to highlight:
D.R. Horton Inc. is the largest U.S. home builder. It scored an 85 on its SmartHoldings model score and has fared well throughout the pandemic, taking full advantage of the excessive demand for housing. A management decision in 2014 to launch its Express Homes brand, which targets price-conscious first-time home buyers, has really paid off. The business unit now accounts for more than 30 per cent of homes sold for the company.
However, competition is extremely high in the industry. With the constraints on land supply and high material costs, D.R. Horton needs to take full advantage of its cost efficiencies and economies of scale to remain competitive in a constantly changing industry.
Skyline Champion Corp., which scored a 96, the second-highest SmartHoldings value on our list, is a factory-built housing company, which means its homes are largely assembled in factories, then transported to sites to be installed. It offers homes for the multifamily, hospitality, senior and work-force housing sectors. Skyline is the second-largest player in the U.S. and the largest in Canada within the manufactured housing market. Its stock performed the best among its peers, generating a total return of 45.1 per cent over the past year.
Even though demand for manufactured housing has been robust, there are concerns the company must consider. The backlog of materials required for production is most concerning, especially if the company wants to keep up with demand in new housing.
Investors are advised to do their own research before trading in any of the securities shown.
Erik Foo, CFA, is a proposition sales specialist at Refinitiv, covering research and portfolio management sales.
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