KB Home: Profit From This Housing Stock In 2014

Nov.22.13 | About: KB Home (KBH)

I've written a number of article over the past few months highlighting ways to profit from the housing market (see here and here) -- but the temperament has changed slightly recently.

After some exhilarating gains, the housing market has certainly quieted down due to a combination of factors.

Mortgage rates saw a spike - hitting a two-year high in August…

The supply of available homes has contracted compared to a few years ago, pushing prices higher…

Of course, the bickering over the US fiscal budget and debt ceiling didn't help housing recovery either …

And making matters worse, consumer sentiment recently dropped to a two-year low - which indicates that people are more worried about their job prospects and financial outlooks, and are more likely to be in savings mode over the coming months…

(The Thomson Reuters/University of Michigan's monthly consumer sentiment index reported a near two-year low of 72.0 in November.)

So naturally, with higher rates, a tighter pool of inventory, turmoil in Washington, and weaker consumer sentiment, this has triggered a recent flurry of profit taking on housing stocks - nearly erasing most of the gains seen this year.

It has been volatile, to say the least.

But while many investors believe that housing is dead in the water because of these headwinds, I see as being far from being the case.

In fact, I believe this current (and temporary) lull is a perfect opportunity to dive back into housing stocks - and in a big way.

Here are some key reasons why...

Although mortgage rates have gradually gone up this year, they remain low by historical standards and most economists do not expect the higher costs to end the recovery altogether.

In the short term, it could also spur potential buyers to act before rates rise further.

With the ongoing speculation that the Fed could taper or end their bond-buying program in 2014, there's a good chance we could see a more sustained rise in rates.

Many people assume that higher rates automatically put a cap on prices and that's not necessarily the case - especially when prices are still significantly undervalued in many markets across the country.

According to Donald Tomnitz, CEO of homebuilder D.R. Horton Inc. (NYSE:DHI), "If you're waiting for a better rate and a better house price, you're going to wait and you're going to find higher rates and higher house prices."

As such, it's unlikely we'll see would-be homebuyers standing on the sidelines for long.

In terms of inventory, housing starts and existing homes for sale in the US have broadly increased year over year.

However, supplies remain tight in a number of major markets.

This means that demand is still able to gobble up increasing supply. While we may not see the buying frenzy and bidding wars that were all the rage earlier this year, as long as demand can absorb the extra inventory we're in good shape to return to a normal, balanced market.

Of course, this bodes well for the homebuilders whose stocks have been hit hardest in the last few months.

In particular, KB Home (NYSE:KBH) is a company that shows good potential to make a splash in the near future.

A Los Angeles-based homebuilder, KB Home constructs residential homes of all sizes in 33 major markets across the country.

Since reaching an all-time high in mid-May, KB Home has fallen over 34% and currently sits at around $16 per share with a market cap of about $1.4 billion.

But although KBH has had trouble with steady earnings in recent years, things could change very quickly for this exciting company.

Their business prefers to focus more on affluent customers with a higher household income and better ability to obtain a mortgage, rather than lower-income homebuyers who are sensitive to home prices and mortgage rate fluctuations.

The targeted communities that they invest in allows them to build larger homes at higher price points, which helps to maximize their margin per unit.

Sales of homes in Nevada, California, and Arizona make up roughly half of all the homes that KBH sells.

Now as you may recall, these were some of the hardest hit states during the housing crisis.

Incidentally, these states posted the highest year over year price gains in the month of September, in a report by property research firm, CoreLogic.

The success of the KB's business model thus helped their net income in Q3 2013 soar a whopping 727% over last year's quarter.

With revenues expected to continue growing in 2014, it's safe to say that KB Home will see a nice return in the next quarter.

In all, investors should look to take advantage of this recent pullback in the housing market rather than wait and see what happens in the New Year -- and KB Home should be on the short list.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.