4 Stocks To Buy Despite Softer Homebuilder Sentiment

Data released on Jul 18 revealed that homebuilder sentiment had declined over the month of May. Developers seemed to be combating a variety of problems, including labor and lot shortages. However, the overall outlook for the sector remains positive and should improve over the rest of the year.

That household demand remains steady is borne out by the details of last month’s retail sale data. Building materials and gardening equipment experienced the largest increase among all categories. Sales at furniture and home furnishing stores also increased. Adding these stocks to your portfolio now would make for a smart investment choice.

NAHB Index Softens

The National Association of Home Builders (NAHB)/Wells Fargo builder sentiment index declined from 60 to 59 in May. Of course, any level above 50 indicates that builders’ views about sale conditions continue to remain optimistic. In any case, the index remained flat at 58 for most of 2016 before increasing to 60 in April.

In May, sales fell by 6% and the outlook for sales also declined. However, sales continued to remain above the pace recorded in 2015 up to May. A substantial pickup in job growth and low mortgage rates have been primarily responsible for this phenomenon.

Home sales will continue to grow over the year, according to the NAHB, though its pace might decline. According to the association’s chief economist, Robert Dietz, multiple factors continue to support steady growth. Most of the slack in sales can be attributed to tougher regulations and labor and lot shortages.

Building Materials, Furniture Sales Increase

Substantial gains for building materials and furniture stores in June’s retail sales report were further evidence of steady growth in housing. Retail sales advanced 0.6% in June from the prior month to a seasonally adjusted $456.98 billion. Household spending was broad-based, with sales excluding autos and gasoline advancing by 0.7%.

Sales were mostly led by a jump of 3.9% in building and supply stores, its largest one-month increase since Apr 2010. Furniture and home furnishing stores also experienced an increase in sales, of 0.5%. Meanwhile, industrial output expanded at the fastest monthly rate in 11 months, adding to the evidence that the economy was expanding at a satisfactory pace.

Our Choices

Sentiment may have declined for homebuilders in May, but this in no way indicates that the sector is in poor health. The pace of growth may decline, but it is likely to remain steady for the rest of the year, given the uptick in other economic indicators.

Meanwhile, June’s retail sales report indicates that sales of furniture, furnishing and building materials and gardening equipment, in particular, have experienced an increase. This is why it may be a good idea to pick such stocks at this point. Selecting winning stocks, however, may be a difficult proposition.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.

Beacon Roofing Supply, Inc. (NASDAQ:BECN) is the second-largest distributor of residential and non-residential roofing materials in the U.S. and Canada.

Beacon Roofing has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. The company has expected earnings growth of 54.4% for the current year. Its earnings estimate for the current year has improved by 0.5% over the last 30 days.

Lowe's Companies, Inc. (NYSE:LOW) is the world’s second-largest home improvement retailer, which has its operations primarily in the U.S., Canada and Mexico.

Lowe's has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of 22.5% for the current year.

Tempur Sealy International Inc. (NYSE:TPX) is involved in the development, manufacturing and marketing of bedding products on a global basis.

Tempur Sealy has a Zacks Rank #1 and a VGM Score of B. The company has expected earnings growth of 21.7% for the current year.

Williams-Sonoma Inc. (NYSE:WSM) is a specialty retailer of products for the home, which utilizes a multi channel approach.

Williams-Sonoma has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth of 5.8% for the current year. The stock’s forward price-to-earnings ratio (P/E) for the current financial year (F1) is 15.13, lower than the industry average of 15.25.