4 Stocks To Buy On Improving Housing Indicators

A series of reports released this month indicate that the housing market is picking up pace after a quiet first quarter. Data released last month showed that new home sales had declined for the third consecutive month in March. However, spring seems to have brought fresh cheer to the sector with demand expected to experience an uptick.

An increase in existing home sales in March has already lent its weight to such an argument. Picking stocks which will benefit from renewed vigor in homebuilding activity looks like a good option at this time.

Non-Residential Construction Spending Up

Construction spending increased 0.3% from February to a seasonally adjusted annual rate of $1,137.5 billion in March. This was lower than the consensus estimate of a 0.5% increase. However, an upward revision was made to February’s increase which shows that spending rose 1% instead of falling by 0.5%.

More importantly, March’s increase was fueled by a 1.5% uptick in residential construction spending. This gain negated a 0.4% fall in nonresidential spending. Over the last 12 months, construction spending has gained 8%. During this period, nonresidential construction increased by 8.3%.

Separately, the National Association of Home Builders (NAHB) reported that home builder sentiment index (HMI) remained flat at 58 in May, for the fourth consecutive month. This is another indication that the sector continues to experience steady growth, fueled by an improving job market and low mortgage rates.

Housing Starts Increase

Meanwhile, housing starts increased 6.6% from March to an annual rate of 1,172,000 in April. This was also higher than the consensus estimate of an increase to 1,123,000. Additionally, the metric was revised upward by 40,000 for the first quarter as a whole. Nearly two thirds of all housing starts are made up of single family homes, which increased by 3.3% in April.

Additionally, housing starts increased by 10.2% during the first four months of 2016, compared with the year-ago period. Significantly, single family housing starts increased 16.8% year over year during this period.

Building permits increased 3.6% from March to 1,116,000 last month. However, the figure was less than the consensus estimate of a rise to 1,134,000. This metric has been sluggish over the last three months, which indicates some trouble for housing starts ahead. However, market watchers believe that an increase in new home sales will boost housing activity over the next few months.

Our Choices

A flurry of reports is indicating that the housing sector continues to experience steady growth. Moreover, there are indications of further improvement over the next few months.

This makes it imperative to pick stocks which will benefit from such a scenario. However, choosing winning stocks often becomes a difficult task.

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.

Hooker Furniture Corp. (NASDAQ:HOFT) is a leading manufacturer and importer of residential furniture, primarily targeted at the upper-medium price range.

Hooker Furniture has a Zacks Rank #1 (Strong Buy) and a VGM Score of B. The company has expected earnings growth of 47.7% for the current year. The forward price-to-earnings (P/E) ratio for the current financial year (F1) is 10.91, lower than the industry average of 16.27.

Installed Building Products, Inc. (NYSE:IBP) operates as a residential insulation installer in the U.S.

World Point Terminals has a Zacks Rank #1 and a VGM Score of B. The company has expected earnings growth of 78.9% for the current year. Its earnings estimate for the current year has improved by 9.6% over the last 30 days.

LGI Homes, Inc. (NASDAQ:LGIH) is engaged in the design and construction of entry-level homes across Texas, Arizona, Florida and Georgia.

LGI Homes has a Zacks Rank #2 (Buy) and a VGM Score of B. The company has expected earnings growth of 35.3% for the current year. It has a P/E (F1) of 7.54, which is lower than the industry average of 9.88.

Universal Forest Products Inc. (NASDAQ:UFPI) engineers, manufactures, treats, distributes and installs lumber, composite wood, plastic and other building products.

Transocean Partners has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 17.5% for the current year. Its earnings estimate for the current year has improved by 3.1% over the last 30 days. It has a P/E (F1) of 17.01, which is lower than the industry average of 27. 40.