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Saturday, January 28, 2023

5 Housing Stocks Turning Covid-19 Into a Long-Term Tailwind

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Believe it or not, the Covid-19 pandemic is actually a reason to buy housing stocks.

Covid-19 changed the world. Three of the bigger changes were that it forced enterprises to adopt remote work, increased how much time everyone spends in their homes, and forced the Federal Reserve to cut rates to zero (and probably keep them there for a while).

The knock-on effects of these changes as they relate to the housing market and housing stocks are three-fold.

First, many companies — like Shopify (NYSE:SHOP), Square (NYSE:SQ), and Facebook (NASDAQ:FB) — are permanently adopting remote work environments. Many of these companies have huge offices in metro areas. Many employees consequently lived in those metro areas, and paid huge rents for small apartments to live close to work. Now, those employees can live wherever they want. Chances are high that many will move out of expensive, small urban housing, towards more affordable, bigger suburban housing.

Second, because we’ve all been stuck at home for the past six months, the value of a home to the consumer has grown exponentially. We all want nice, big homes with spacious backyards and pools now. This dynamic, coupled with an employee migration out of cities, should create supercharged demand for suburban homes over the next several years.

Third, mortgage rates are at all time lows. That means buying a home today is more affordable than ever before, so supercharged suburban housing demand over the next few years will be given unprecedentedly strong firepower to convert into action.

In other words, suburban housing markets — and by extension, housing stocks — are on the cusp of a huge, multi-year growth cycle thanks to Covid-19.

With that in mind, here are five housing stocks to buy thanks to Covid-19 tailwinds:

  • KB Homes (NYSE:KBH)
  • Lennar (NYSE:LEN)
  • D.R. Horton (NYSE:DHI)
  • Toll Brothers (NYSE:TOL)

KB Homes (KBH)

KB Home residential development project on Communications Hill in San Jose, South San Francisco Bay Area; KB Home builds homes primarily for first-time home buyers (KBH housing stocks))

Source: Sundry Photography / Shutterstock.com

KB Homes is one of my favorite housing stocks to buy for three reasons.

First, the company is focused on creating affordable, entry-level homes for first-time buyers. Much of the migration out of urban areas on the back of remote work gaining traction will be driven by young, first-time home buyers.

Second, KB Homes is also committed to making environmentally positive new homes with solar panels. Nearly half of millennial homebuyers want both solar panels and energy storage in their home. In essence, then, KB Home is making the perfect home for the perfect audience (millennial, first-time home buyers moving out of the city and into the suburbs).

Third, KBH stock is undervalued. Fiscal 2021 earnings per share estimates were sitting around $4 prior to Covid-19 emerging. They have since plunged. But I think there’s a chance that, by the end of the year, fiscal 2021 EPS estimates rebound to $4, on the back of favorable housing market fundamentals.

If so, a historically average 10.5-times forward earnings multiple on $4 in 2021 earnings per share implies a 2020 price target for KBH stock of over $40.

LGI Homes (LGIH)

Located in the Mojave Desert City of Victorville, California, a feather flag sign for LGI Homes with text of New Homes - 0% Down. (LGIH)

Source: Felipe Sanchez / Shutterstock.com

When it comes to LGI Homes, there are two things to like, and one thing to be cautious of.

On the like side, LGI Homes — like KB Homes — sells entry-level homes to first-time homebuyers, and will therefore benefit from favorable demographic and urban migration trends over the next few years.

LGI Homes also has a strong geographic concentration in states with consumers who appear less concerned about Covid-19. Think states like Texas, Florida, Georgia, and South Carolina. LGI Homes has a huge presence in all these states, and therefore, should see its growth trends improve both more quickly and meaningfully than the broader U.S. housing market over the next few months.

On the negative side, however, LGIH stock is fully valued. A V-shaped recovery in demand will prompt analysts to revise fiscal 2021 earnings per share estimates higher. They will likely raise them to near where they were prior to Covid-19 emerging — around $9. A 10.5-times forward earnings multiple on that implies a 2020 price target for LGIH stock of nearly $95.

LGIH stock already trades above that today.

However, I’m not too concerned about valuation here, because it’s very minor valuation friction against the backdrop of favorable near-term and long-term growth prospects, the likes of which should keep LGIH stock on an uptrend.

Lennar (LEN)

Lennar (LEN) website homepage. Lennar logo visible on the phone screen

Source: Shutterstock

Lennar is one of the best housing stocks to buy to play Covid-19-related housing market tailwinds for one very simple reason: the homebuilder has robust and diverse geographic and demographic exposure across the entire housing market.

Lennar makes first-time, move-up, and retirement homes. The company also sells across all price points, from entry-level to luxury homes. And it sells in almost any state, from California to New Jersey.

In other words, investors should see LEN stock as a pure and broad exposure play on the housing market recovery.

From this perspective, it doesn’t really matter who moves out of cities over the next few years, what types of homes they buy, or where they buy them. Lennar will win so long as suburban housing demand of any sort goes up over the next few years.

That reality alone makes LEN stock a worthy buy for the next few years.

D.R. Horton (DHI)

In this photo illustration the D.R. Horton (DRI) logo seen displayed on a smartphone.

Source: Casimiro PT / Shutterstock.com

Much like Lennar, D.R. Horton offers investors a broad strokes way to play the suburban housing market boom over the next few years.

The nation’s largest homebuilder by volume, D.R. Horton builds homes in 89 markets across 29 states, and sells everything from $100,000 entry-level homes to seven-figure luxury homes. Thus, regardless of which particular housing market vertical booms the most over the next several years, so long as the Covid-19 pandemic does create demand tailwinds for the whole market, D.R. Horton’s growth trends will improve, and DHI stock will rally.

Of note, D.R. Horton is the No. 1 homebuilder in today’s fastest-growing cities, like Dallas, Houston, Phoenix, or Austin. Those quickly-growing cities will see a significant demand shift from urban to suburban, creating big demand for suburban homes in many of D.R. Horton’s core markets. Naturally, this will reflect favorably on the company’s growth trends.

Toll Brothers (TOL)

Toll Brothers (TOL) Home construction company logo seen displayed on smart phone

Source: IgorGolovniov / Shutterstock.com

Last, but not least, on this list of housing stocks to buy on the back of Covid-19 tailwinds is Toll Brothers. Toll Brothers is perhaps best known as the nation’s largest builder of luxury homes. For the most part, the company makes seven figure homes.

Demand for these luxury homes will likely accelerate over the next few years, because Covid-19 has served as a reminder that the home is a very important place. Indeed, surveys from Realtor.com found that demand for bigger homes will likely boom thanks to the Covid-19 pandemic.

Thus, over the next few years, many homeowners will consequently look to “move up” and graduate from small, starter homes to bigger, more advanced, potentially luxury homes.

Demand for Toll Brothers’ signature homes will soar. So will the homebuilder’s revenues, profits, and stock price.

As such, if you’re looking to play a demand surge in the luxury housing market over the next few years, TOL stock is a solid pick.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long SHOP, SQ, and FB. 

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