If one industry has gone in and out of favor over the past six years, it has been the homebuilders. With many of the top stocks trading in the single digits after the subprime mortgage collapse, the industry rallied hard from the end of 2008 until pulling back in a big way last year. With interest rates plummeting to levels not seen since the mid-1950s, and banks finally loosening the death-grip on credit, the industry has made some massive strides to start 2015.
A new research report from the analysts at J.P. Morgan points out the homebuilders were hammered through January, and then made an abrupt turnaround as earnings came out. The analysts cite more positive builder commentary and several recent encouraging macro data points as reasons for the reversal, and they continue to expect housing to recover at a modest pace in 2015.
We screened the J.P. Morgan homebuilder universe for the stocks rated Overweight, and we found five that make good sense now. They range from the large-cap leaders to the smaller-cap niche builders.
Lennar Corp. (NYSE: LEN) is a homebuilder that the J.P. Morgan team remains very positive on. With the banks and lenders finally loosening credit, some think that the homebuilding industry could have a continued outstanding 2015. Housing starts have improved 7.8% year-over-year, suggesting that the broader housing trends are very much in place. Lennar builds affordable, move-up and retirement homes, and the company’s financial services segment provides mortgage financing, title insurance and closing services for buyers.
Lennar investors are paid a small 0.35% dividend. The J.P. Morgan price target is $49, and the Thomson/First Call consensus target is lower at $46.58. Shares closed trading on Wednesday at $49.17, above the current targets.
Ryland Group Inc. (NYSE: RYL) is a homebuilder and a mortgage-finance company. Its six operating business segments focus on four geographically determined homebuilding regions, and financial services and corporate. Pent-up demand from young adults is one of the key reasons to own the stock, especially with rates still low and the availability to credit from lenders improving. The company’s price points are designed to attract the first-time and second-time buyer, and that is a large segment coming in to the current market.
Ryland investors are paid a small 0.3% dividend. J.P. Morgan has a $47 target, and the consensus target is $42.70. Shares closed Wednesday at $44.34.
Taylor Morrison Home Corp. (NYSE: TMHC) posted very solid fourth-quarter results and geographically is well located for continued growth. The company is a leading national builder and developer based in Scottsdale, Ariz., and operates under two well-established brands. Taylor Morrison builds and develops distinctive communities from coast to coast, serving a wide array of homeowners and aimed mainly at first-time, move-up, luxury and 55 or better customers. Darling Homes builds communities in Texas, catering to move-up and luxury home buyers seeking a personalized building experience.
The J.P. Morgan price objective is $21.50, and the consensus target is set at $21.06. Shares closed at $18.66.
LGI Homes Inc. (NASDAQ: LGIH) announced last month an all-time record for closings during a single month, with 246 homes closed in December 2014, a very good sign for shareholders. LGI Homes engages in the design and construction of homes in Texas, Arizona, Florida, Georgia, New Mexico and North Carolina. Its core markets include Houston, San Antonio, Dallas/Fort Worth, Austin, Phoenix, Tampa, Orlando, Atlanta, Tucson, Albuquerque and most recently Charlotte. Analysts are bullish on the overall sun-belt growth cities, and LGI looks perfectly located.
The J.P. Morgan price target is $19, while the consensus target is higher at $21.80. The stock closed Wednesday at $13.38.
William Lyon Homes (NYSE: WLH) has jumped in price since the end of January, and looks to be breaking a long-term downtrend line. The company is one of the largest western U.S. regional homebuilders. Headquartered in Newport Beach, Calif., the company is primarily engaged in the design, construction, marketing and sale of single-family detached and attached homes in California, Arizona, Nevada, Colorado, Washington and Oregon. Its core markets include Orange County, Los Angeles, San Diego, the San Francisco Bay Area, Phoenix, Las Vegas, Denver, Seattle and Portland. Again, all solid growth markets, with purchasing demographics that favor the company.
J.P. Morgan sets the price target at $27, and the consensus target is $26.33. Shares closed trading on Wednesday at $22.72.
While the gigantic money that was made in 2009 and 2010 is long gone, the top homebuilders are a good play for investors who like continuing domestic growth. While the stronger dollar and falling oil prices may slow things down, the overall picture looks bright and the top companies have played this round in a far more conservative fashion.