2 Homebuilding Stocks To Buy Despite Drop In Existing Home Sales

Includes: KBH, LEN, PHM, TOL
by: Bidness Etc

More housing data has been released since our last update on the Homebuilder Industry. With the exception of pending home sales, everything else maintained its rising trajectory, which substantiated our bullish thesis on this sector. Meanwhile, the latest quarter's earnings release by two of the major homebuilders, KB Home (NYSE:KBH) and Lennar Corp (NYSE:LEN), illustrated that the housing sector is gaining traction.

In accordance with our consistent opinion, KB Home and Lennar Corp are poised for further upsides, evident from their latest quarter's earnings, where they showed an increase in orders, deliveries, and most importantly, contract backlogs (which indicates potential future sales). Pulte Group (NYSE:PHM), Toll Brothers (NYSE:TOL) and D.R. Horton also have upside potentials, but risk-averse investors might find the present to be an appropriate time to lock in safe profits by decreasing long positions.

Recent Housing Data

According to the Commerce Department, new home sales in August have dropped slightly (0.3%) to a seasonally adjusted level of 373,000. However, the decrease followed an upwardly revised 374,000-unit level reached in July, the highest since April 2010. Still, they recorded a 27.7% YoY increase. However, the median price for a new home amounted to $256,900, which is the highest since March 2007. This price showed a 17% YoY increase and saw the largest percentage increase since December 2004.

The S&P/Case-Shiller composite indices are closely-monitored barometers of U.S. home prices. Its 20-city index augmented for the sixth consecutive month in July, on a seasonally-adjusted basis, by 0.4%. The data released earlier this month showed that existing home sales in August have shown a whopping increment of 7.8%, the fastest pace in more than two years. New housing starts augmented by 2.3% in August, while homebuilder sentiment also touched a six-year high.

The only point of concern is pending home sales. According to a report released today by the National Association of Realtors, pending home sales saw an unexpected drop of 2.6% after touching a two-year high last month.

Homebuilders - Share Price Movements (YTD)

The following chart shows the share price movements of the homebuilders under our coverage:


Lennar - In Focus

Please note that while previously we recommended investors decrease long positions in Lennar so as to realize immediate gains, its earnings release has convinced us to change our thesis, as we expect the third-largest homebuilder to continue to be a gem for shareholders. Recently, Credit Suisse also increased its target price from $34.5 to $35.5, as a result of the company's splendid operating performance.


The following table is an updated version of the key valuation components for the homebuilders under our coverage.






Forward P/E (1 year)






Price/Book (MRQ)






Dividend Yield






Source: Yahoo Finance

PHM, TOL, and DHI are relatively expensive on both forward a P/E and P/B basis. LEN and KBH also have high valuation multiples, but their operating performance and dividend yield make us prefer them over the other three players, who have rallied by a huge margin already, as is evident in the graph given above. KBH's share price appreciation is primarily driven by a surprise profit that it recently posted, against expectations.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Housing Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.

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