So far this year,Meritage Homes Corporation (NYSE:MTH) has already gained 24%, feeding off the market's increased confidence in the validity of the housing recovery. Currently, Meritage is sitting over six points below its 52 week high which it reached in May of this year.
At its current price, Meritage Homes holds a price to earnings ratio of 14.14 and a price to book ratio of 2.28 which are very reasonable considering the industry averages of 21.91 and 5.34 respectively.
What makes this company such a great candidate for possible investment is the fact that along with its affordable valuation, it has superb growth prospects for which analyst estimates are shown below.
By focusing on building "single-family detached homes" in high-growth areas such as the West and the more urban areas of the South, ex. Suburbs of Charlotte, Meritage has aligned itself well to supply housing to consumers looking to avoid the high cost of living problems associated with some of the more traditional locations in the Northeast and Mid-Atlantic. The diversity of the locations of their homes makes them a safer investment than many of their competitors who choose to only operate in one general area. In addition to this, they also offer homes ranging from "entry-level" to "luxury" to increase their chances of remaining lucrative in a large spread of business environments.
Where does the Fed come into play?
Part of the market's relatively cheap valuation of Meritage can be attributed to concerns that any slowing down of the Federal Reserve's quantitative easing program may raise interest rates so high that it would sufficiently reduce demand for housing. Today, Ben Bernanke stated that the Fed's bond purchases were not firmly tied to a calendar and it can be assumed that if a reduction of bond purchases has a negative impact on the country, they will step back in to ensure that the recovery continues. Also, a slight increase in interest rates may actually help Meritage because it will likely make banks more willing to grant mortgages to potential customers.
Meritage will be announcing its earnings on July 24, 2013. Since it began this quarter housing prices have risen 1.15% nationally according to the S&P/Case-Shiller study (homes in locations targeted by Meritage are likely to have increased by more) and the consumer confidence index is now at its highest level since the 2008 crisis.
The Take Away
Meritage Homes Corporation is a great company that is poised to sustain well above average growth over at least the next two years and is priced at a level allowing investors to get a piece of this action. With 95% of the shares currently held by institutional investors, the smart money has recognized this opportunity and is ready for the stock to continue to rise.
Disclosure: I am long MTH. 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.