4 Best Large-Cap Homebuilding Stocks to Buy on the Dip
The work from home trend and record-low mortgage rates have spurred the demand for housing over the past year. And although mortgage rates are expected to climb now, analysts believe...
The work from home trend and record-low mortgage rates have spurred the demand for housing over the past year. And although mortgage rates are expected to climb now, analysts believe that rates will remain attractive for home buyers. Hence, we think it could be wise to buy the dip in quality homebuilding stocks Lennar (LEN), NVR (NVR), Sekisui (SKHSY), and Persimmon (PSMMY). Let's discuss.
The homebuilding industry has grown significantly on soaring demand for new homes over the past year. The work-from-home trend motivated millennials to buy single-family dwellings, expediting their shift from renting to owning. Furthermore, with mortgage rates falling to record lows, many homebuyers have secured homes at attractive costs.
The U.S. housing market broke records in 2021, delivering one of its strongest performances in 15 years. However, mortgage rates have been inching up after falling to an all-time low last year. And the Fed has indicated that a hike in interest rates is imminent, perhaps as early as March. According to Bankrate chief financial analyst Greg McBride, mortgage rates are expected to climb up to 3.75% this year before falling back to 3.5% by the end of 2022. He said, "3.5 percent is higher than where we are now, but it's still lower than anything we'd ever seen before the pandemic. So, it's still going to be an environment of low and attractive mortgage rates." Also, Realtor.com expects home sales growth of 6.6% in 2022.
Given this backdrop, we think it could be wise to scoop up quality homebuilding stocks Lennar Corporation (LEN), NVR, Inc. (NVR), Sekisui House, Ltd. (SKHSY), and Persimmon Plc (PSMMY). They are currently trading much below their 52-week highs but have significant upside potential.
Lennar Corporation (LEN)
LEN is a Miami Fla.-based homebuilder and an originator of residential and commercial mortgage loans. The company provides title insurance and closing services and develops multifamily rental properties. Its homebuilding operations are engaged in constructing and selling single-family attached and detached homes. It also purchases, produces, and sells residential land to third parties. It has a market capitalization of $27.76 billion.
On Oct. 26, 2021, LEN announced its plan to build the largest community of 3D-printed homes in partnership with ICON. The 100-home project is expected to break ground this year and be codesigned by BIG-Bjarke Ingels Group. Using 3D technology should help LEN make affordable homes of good quality and help keep the costs and environmental impact to a minimum.
LEN's revenue increased 24% year-over-year to $8.43 billion for the fourth quarter, ended Nov. 30, 2021. The company's net income increased 34.8% to $1.19 billion. Also, its EPS was $3.91, representing a 38.6% increase year-over-year.
Analysts expect LEN's EPS for the quarter ending May 31, 2022, to increase 41.5% year-over-year to $3.75. Its revenue for its fiscal year 2022 is expected to increase 20.1% year-over-year to $32.57 billion. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 11% in price to close the last trading day at $94.83. It is currently trading 19.3% below its 52-week high of $117.54, which it hit on Dec. 13, 2021.
LEN's strong fundamentals are reflected in its POWR Ratings. It has an overall B rating, which equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
NVR, Inc. (NVR)
Reston, Va.-based NVR is engaged in constructing and selling single-family detached homes, townhomes, and condominium buildings. The company operates in Homebuilding Mid Atlantic; Homebuilding North East; Homebuilding Mid East; and Homebuilding South East segments. In addition, it provides mortgage-related services to home building customers through its mortgage banking operations. It has a market capitalization of $18.72 billion.
On Nov. 3, 2021, NVR's board of directors authorized a $500 million buyback of its outstanding common stock. According to the company, the authorization is a continuation of its stock repurchase program that began in 1994 and is in line with NVR's strategy of maximizing shareholder value.
For its fiscal fourth quarter, ended Dec. 31, 2021, NVR's net income increased 9.7% year-over-year to $334.58 million. The company's EPS increased 15.8% year-over-year to $89.09. In addition, its operating income increased 20.3% year-over-year to $404.84 million.
For the quarter ending March 31, 2022, NVR's EPS and revenue are expected to increase 52.4% and 18.7%, respectively, year-over-year to $95.93 and $2.33 billion. Over the past year, the stock has gained 20.7% in price to close the last trading session at $5,431.38. It is currently trading 9.2% below its 52-week high of $5,982.45, which it hit on Dec. 9, 2021.
NVR's POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to a Buy in our proprietary rating system.
Sekisui House, Ltd. (SKHSY)
Based in Osaka, Japan, SKHSY designs, constructs, and contracts built-to-order detached houses. The company operates through Custom Detached Houses; Rental Housing; Architectural/Civil Engineering; Remodeling; Real Estate Management Fees; Houses for Sale; Condominiums; Urban Redevelopment; and Overseas segments. It has a market capitalization of $13.74 billion.
On Jan. 20, 2022, SKHSY announced that its U.S. subsidiary SEKISUI HOUSE US Holdings, LLC had acquired The Holt Group. Holt is one of the largest private homebuilders and land developers in the Pacific Northwest. SEKISUI HOUSE US Holdings CEO Hiroaki Takahama said, "We are excited to partner with Holt to capitalize on compelling opportunities in the U.S. housing market, particularly in the Pacific Northwest."
SKHSY's net sales for nine months ended Oct. 31, 2021, increased 4.3% year-over-year to ¥1844.81 billion ($16.07 billion). The company's operating income increased 24.7% year-over-year to ¥168.22 billion ($1.46 billion). And its profit came in at ¥115.89 billion ($1.01 billion).
Analysts expect SKHSY's revenue for fiscal 2022 to increase 8.8% year-over-year to $10.64 billion. The stock has gained 2.6% in price over the past year to close the last trading session at $20.36. It is currently trading 8.9% below its 52-week high of $22.35, which it hit on Dec. 28, 2021.
SKHSY's POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to a Buy in our proprietary rating system.
It has an A grade for Stability and a B grade for Value and Quality. It is ranked #3 in the Homebuilders industry. Click here to see the additional ratings of SKHSY for Growth, Momentum, and Sentiment.
Persimmon Plc (PSMMY)
Headquartered in Fulford, York, U.K., PSMMY is a holding company that operates as a house builder. The company offers family housing under the Persimmon Homes brand name, executive accommodation under the Charles Church brand, and social housing under the Westbury Partnerships brand name. It has a market capitalization of $10.32 billion.
For six months ended June 30, 2021, PSMMY's total revenues increased 54.6% year-over-year to £1.84 billion ($2.49 billion). The company's gross profit increased 56.5% year-over-year to £540.5 million ($733.81 million). In addition, its profit after tax increased 64.6% year-over-year to £391.20 million ($531.11 million). And its EPS came in at 122.10p, compared to 74.40p in the year-ago period.
The stock has declined 12.4% in price over the past year to close the last trading session at $64.71. It is currently trading 32.2% below its 52-week high of $95.50, which it hit on May 10, 2021.
PSMMY's strong fundamentals are reflected in its POWR ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
LEN shares were unchanged in premarket trading Friday. Year-to-date, LEN has declined -18.05%, versus a -6.21% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master's degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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