Fundstrat’s Tom Lee is bullish on housing in 2015.
To play the housing recovery, Lee recommended that investors buy homebuilder stocks.
“From 1992 to 2005, homebuilders tracked housing starts pretty closely,” Lee wrote in a recent note to clients. “Even the dips and surges were fairly closely tracked. From the 2009 depths, this has continued to hold as well.”
Improved household credit will further fuel housing starts in 2015, Lee wrote.
He identified the largest homebuilding stocks based on market cap, and ranked them by their mean implied upside.
Market Cap (in millions): $US2,837
Implied Upside: 3%
P/E ('15 E): 13.4x
Comment: Brookfield saw a 58.8% decrease in short interest, or bets the stock price will fall, between November and December.
Market Cap (in millions): $US1,216
Implied Upside: 6%
P/E ('15 E): 13.0x
Comment: 'While the downward pressure on our margin is disappointing in the short term, the longer-term trend has been positive, with more than 300 basis points of improvement since the low of 2011,' CEO Larry Mizel said during the Q3 2014 earnings call. 'We believe that the long-term trend will continue to be positive as the volatility we have seen in our industry gives way to a more sustained level of healthy demand.'
Market Cap (in millions): $US7,760
Implied Upside: 8%
P/E ('15 E): 14.9x
Comment: 'Del Webb, a national brand of Atlanta-based PulteGroup, has acquired 200 acres next to The Woodlands to build a new community for active adults,' the Houston Business Journal reported January 13.
Market Cap (in millions): $US8,715
Implied Upside: 8%
P/E ('15 E): 13.8x
Comment: Homebuilding revenues climbed 32.4% year over year to $US2.33 billion in Q4 2014, while home sales rose 31.8% to $US2.28 billion.
Market Cap (in millions): $US8,654
Implied Upside: 10%
P/E ('15 E): 12.5x
Comment: 'Current land ownership level is sufficient to support double-digit revenue growth,' the company wrote in its Q4 FY2014 investor presentation.
Market Cap (in millions): $US1,658
Implied Upside: 13%
P/E ('15 E): 10.5x
Comment: 'We're optimistic about the future of the home building in the cities in which we build,' said CEO Larry Nicholson during the Q3 2014 earnings call. 'Thanks to a strengthening employment picture, a favourable affordability dynamic and a low level of housing inventory.'
Market Cap (in millions): $US489
Implied Upside: 17%
P/E ('15 E): 15.0x
Comment: 'Net income attributable to common shareholders was $US3.1 million, or $US0.12 per diluted share, compared to a net loss of $US17.0 million, or $US0.71 per diluted share in the prior year period,' according to the company's third quarter earnings.
Market Cap (in millions): $US493
Implied Upside: 19%
P/E ('15 E): 11.1x
Comment: 'We continue to believe that the fundamentals have been in place and remain in place to support further improvement in housing conditions throughout our 13 markets,' said CEO Robert Schottenstein during the Q3 2014 earnings call.
Market Cap (in millions): $US2,215
Implied Upside: 20%
P/E ('15 E): 10.8x
Comment: Early January, TPI acquired 115 lots in Aurora, Colorado, to build a new community that will include 115 single-family detached homes, expanding its presence in the Denver area.
Market Cap (in millions): $US1,292
Implied Upside: 23%
P/E ('15 E): 8.9x
Comment: 'Today we are the ninth largest U.S. home builder operating in nine states in 14 of the top 20 home building markets, and we believe we can continue to grow and gain market share,' CEO Steven Hilton said on October 29 during the Q3 2014 earnings call. 'While dividends or share buybacks may be appropriate for some builders who are already in many more markets, we believe we can still provide the best returns for our shareholders by continuing to invest in the best long-term markets for home building.'
Market Cap (in millions): $US1,091
Implied Upside: 26%
P/E ('15 E): 12.2x
Comment: KB Home reported $US796 million in revenues for Q4 2014, up 29% from the prior year, on 2,229 deliveries.
Market Cap (in millions): $US1,992
Implied Upside: 32%
P/E ('15 E): 8.4x
Comment: 'I believe many thought we would see normal housing growth in 2014,' said CEO Sheryl Palmer during the Q3 2014 earnings call. 'We believe 2014 might be an indication of a new normal. We believe this new normal will continue to evolve and will likely include a positive market trajectory that comes along the way as the industry infrastructure rebuild, lending normalizes, and consumer demand increases.'
Market Cap (in millions): $US1,898
Implied Upside: 33%
P/E ('15 E): 10.9x
Comment: In November, the company announced a public offering of $US300 million aggregate principal amount of senior notes due in 2024. 'The company intends to use the net proceeds of the notes offering for general corporate purposes, which may include land acquisition and development, home construction, repurchases of the company's common stock and other related purposes,' it said in a statement.
Market Cap (in millions): $US462
Implied Upside: 34%
P/E ('15 E): 11.3x
Comment: 'We were extremely happy to report positive net income for fiscal 2014,' CEO Allan Merrill said during the Q4 2014 earnings call. 'This is the first time we've reported a profitable year since 2006 and is obviously a very important milestone for the company, our employees and our shareholders.'
Market Cap (in millions): $US634
Implied Upside: 43%
P/E ('15 E): 25.2x
Comment: 'We have experienced some improvements in certain markets that have previously been particular difficult including Florida, California and several other states,' CEO Joseph Stegmayer said during the company's Q2 2015 earnings call. 'These are modest increases though nevertheless very welcome from geographic areas that were particularly hard hit by the recession and the overall decline in the housing market.'
Market Cap (in millions): $US557
Implied Upside: 49%
P/E ('15 E): 6.8x
Comment: 'We are excited to announce the launch of William Lyon Mortgage, LLC, and believe that this new venture will benefit our homebuyers and complement our homebuilding operations, while providing an additional source of earnings for the Company,' said CEO Matthew R. Zaist in a January 15 announcement.