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Freddie Mac's July 2012 U.S. economic and housing market outlook provides some interesting insights on the real estate market and, more specifically, the construction industry. In July, the agency increased its second-quarter outlook on housing starts, housing sales, and housing price appreciation. Based on the report, housing starts show the greatest potential for improvement in the next 12 months.

Housing starts are expected to reach an annual rate of 730,000 units for the second quarter. Home sales for single-family units are estimated to reach an annual rate of 4.94 million. Furthermore, home prices are reported to show an improvement of 3.0% for the second quarter. Home sales and price appreciation are predicted to taper off, but growth in housing starts is expected to continue.

An increase in housing starts should help bolster profits for the construction industry and leading construction companies in particular. In the residential construction industry, the following four public companies have strong track records and positive prospective earnings outlooks for the next 12 months. These stock investments could potentially help increase returns for investors seeking to add allocations to the real estate portion of an investment portfolio.

Standard Pacific (NYSE:SPF): On a year-to-date, one-year and three-year total return basis, Standard Pacific has led the Morningstar Residential Construction Industry group. The investment had a July 27 year-to-date return of 99.06%, one-year return of 87.83%, and a three-year return of 26.59%. SPF has a current market capitalization of $1.2 billion and a stock price trading around $6.02. The California-based company specializes in single-family home construction in some of the largest markets in the United States.

Lennar (NYSE:LEN): Common shares of Lennar bested SPF on a three-year total return basis, gaining 40.28%. LEN has a current market capitalization of $5.7 billion and a stock price trading around $30.34. The Miami-based company specializes in building new homes in affluent communities that tailor to a variety of lifestyles.

Meritage Homes (NYSE:MTH): On a five-year total return basis, Meritage Homes led the industry group with a return of 12.79%. MTH has a market capitalization of $1.2 billion and a stock price trading around $37.78. The Arizona-based company focuses its building on energy-efficient luxury homes.

NVR, Inc. (NYSE:NVR): This name was the leader in the industry group on a 10-year total return basis, gaining 10.65%. The stock's market capitalization ranked fifth in the industry group at $4.0 billion. The company's stock was recently trading around $779.13. The Virginia-based homebuilder's focus is on single-family detached homes, townhomes, and condominium buildings.

Additional performance data on these investments can be found in the table below:

Appendix 1

Name

Current Price $

Market Cap ($B)

YTD Total
Return (%)

1-Year Total Return (%)

3-Year Total Return (%)

5-Year Total Return (%)

10-Year Total Return (%)

Standard Pacific Corp.

6.02

1.20

99.06

87.83

26.59

-16.37

-6.03

Lennar Corporation

30.34

5.74

54.25

68.24

40.28

0.14

4.19

Meritage Homes Corporation

37.78

1.24

60.54

73.00

18.74

12.79

9.70

NVR, Inc.

779.13

3.95

11.47

9.84

8.25

5.33

10.65

Fidelity Select Construction & Housing Portfolio

42.26

11.18

16.28

16.16

18.05

2.89

9.29

Data from Morningstar as of July 27, 2012.

Fidelity's Select Construction and Housing Portfolio (MUTF:FSHOX) also provides an investment opportunity for investors interested in a more diversified construction portfolio.

The fund seeks capital gains through investment in common stocks of residential construction companies. The fund also invests in commercial construction companies and companies that manufacture housing products. As of May 31, 2012, the fund held 2.9% in Lennar and 0.4% in Standard Pacific.

Year to date, the fund has returned 16.28%. On a one- and three-year basis, the fund has returned 16.16% and 18.05%, respectively.

Source: Investment Opportunity In The Real Estate Market Focused On The Construction Industry