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Summary

  • The U.S. housing market continues to see price build-up, although a slowing rate of sales has put a question mark on the recovery.
  • Investing in selective small-cap players such as UCP Inc. and Tri Pointe Homes Inc. could yield handsome returns.
  • The stock’s target price was recently lowered to $16 from $20 by analysts at JMP Securities, although the brokerage’s view on the stock continues to be bullish.
  • At a forward P/E ratio of 12.1, the stock is not expensive and the icing on the cake is the recent technical correction which has made it even more attractive.

The U.S. housing market continues to see price build-up, although a slowing rate of sales has put a question mark on the recovery. The situation has also made policymakers uncomfortable, although it is unlikely to expect some top level intervention as yet. Meanwhile, investing in selective small-cap players such as UCP Inc. (NYSE:UCP) and TRI Pointe Homes Inc. (NYSE:TPH) could yield handsome returns. While TRI Pointe has demonstrated how a growing business can make valuations fall in line, UCP seems to be following the lead.

UCP Inc. is a small-cap homebuilder and land developer primarily operating in Northern California and Washington. Owing to its small size, the company represents an evolving business with a healthy balance sheet. The investment thesis for this stock rests on the 18 percent decline it has witnessed over the last three months. This sell-off, following the fourth quarter results, seems excessive.

Although the company is not profitable as of now, there are several reasons to believe it may be primed for a comeback. From a top line of just $24.2 million in 2011, the company's business registered a turnover of $92.7 million last year. This rapid expansion has not piled up a debt mountain on the company's books, as the debt equity ratio of 0.4 indicates. The stock's target price was recently lowered to $16 from $20 by analysts at JMP Securities, although the brokerage's view on the stock continues to be bullish. Citigroup (NYSE:C) also likes the stock and views the current sell-off as a buying opportunity. Technically, the stock seems to have hit the bottom and has gained support at lower levels after releasing first quarter results, which were not viewed positively by the market.

TRI Pointe Homes Inc. is a specialized player with a clear focus on single-family homes in metropolitan areas. The company primarily operates in Southern and Northern California where the demand for its homes is pretty high. This is reflected in surging revenues and profits.

For the latest three months ended March 2014, the company's top line shot up 161 percent to $72.8 million while profits jumped to $4.3 million, up from $0.3 million in the same period of 2013. The stock is currently valued at 27.1 times its earnings in the trailing 12 months. At a forward price earnings ratio of 12.1, the stock is not expensive and the icing on the cake is the recent technical correction, which has made it even more attractive. Analysts at Sidoti have recently upgraded the stock to a "buy" while FBR has a target of $19 per share, implying an upside of 15 percent

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.