As Housing Market Index Rises, Buy These 3 Home Building Stocks

U.S. home builders have become more optimistic about the single-family housing industry, as the Housing Market Index (HMI) rose to 65 points for September. The index tracks how confident homebuilders are about the market for single family homes, and it can range from 0 to 100 points. A score of 50 or higher is associated with the notion that builders view conditions for the single family market as good.

The reading for August was originally 60, but it has since been revised down to 59. This means that the index climbed 6 points in September. The last time the reading was at a level this high was in October of last year. Before then, the index hadn’t reached the 65 point threshold since 2005. Such strong momentum suggests that activity is building up within the single-family home building space.

To profit off of a bullish housing market with signs of firming, you should consider buying these commercial and residential home building stocks. Each of these stocks has impressive earnings growth forecasted for this year. These companies also have attractive valuation metrics to back them up.

Century Communities Inc- (NYSE:CCS)

Century Communities builds homes in the states of Colorado, Georgia, Utah, Nevada, and Texas. In addition to Century Communities, they also own brands such as Grand View Builders and Jimmy Jacobs Homes. With these brands, Century Communities has a diverse price range of homes to offer for its customers. CCS stock is a Zacks Rank #3 (Hold) and it has a market cap of $421 million.

The company makes for a viable investment candidate. It currently trades at a forward PE of 7.84, which is well below the industry’s average PE of 11.44. CCS also trades at a price-to-book of 1 and a price-to-sales of just 0.44. With valuations this low, the stock could be getting overlooked by the broader market.

Century also has growth characteristics that make it quite attractive. This year, EPS and sales are projected to grow by 35.6% and 31.4% respectively. In addition to having a bright future outlook, Century’s recent history has been impressive. In fact, the stock has topped our earnings consensus in each of the last four quarters. Just last quarter, CCS topped out EPS estimate of $0.55 by 12.7%. The home builder is expected to release its next quarterly earnings report in early November.

M.D.C. Holdings Inc- (NYSE:MDC)

M.D.C. is a holding company with subsidiaries that provide home building and financial services. Through its home building brand, it has been building and designing new homes across the US for over three decades. The holding company’s other subsidiaries provide financing services (such as mortgage lending and title insurance) for home buyers. MDC is a Zacks Rank #1 (Strong Buy) and it provides investors with a 2.03% annual dividend yield.

MDC’s forward PE of 11.52 is in line with the industry standard, but its PEG of 0.47 helps it to stand out as a cheap stock within the commercial home building space. M.D.C. Holdings’ stock trades at a price-to-book of 0.96. When a company’s price-to-book is below one, it could be undervalued.

MDC’s Growth grade of “B” shows that there’s more to this company than its fundamental valuation metrics. Earnings are forecasted to increase by 52.5% this year, and revenues are expected to pick up by 22%. Over the last two months, four analysts have revised their fiscal year EPS expectations upwards for MDC. In that time frame, no analysts have revised their current year expectations lower. MDC topped our earnings consensus estimate by 12.24% when it reported its earnings last quarter.

PulteGroup Inc- (NYSE:PHM)

PulteGroup Inc. is one of the nation’s largest and most diversified homebuilders. It focuses on managing its homebuilding and financial services businesses, and the holding company has brands which include Centex, Del Webb, DiVosta, Pulte Homes, and John Wieland Homes and Neighborhoods. PulteGroup is a Zacks Rank #2 (Buy) and it gets a “B” for Value in our Style Scores. The stock also doles out a dividend that yields 1.84% annually.

PulteGroup is cheap across several important valuation metrics. The company has an EV/EBITDA of 10.52, and this is slightly lower than the industry’s average EV/EBITDA of 11.44. The company also has a forward PE of just 12.12. To put this into perspective, the average forward PE of the S&P 500is 18.25.

PulteGroup stands to benefit from the strength in the housing market. This year, the company’s EPS (earnings per share) and sales are forecasted to increase by 27% and 24.7% respectively. Its trailing twelve month net margin of 7.89% is well ahead of the industry’s average net margin of 5.39%.

Over the last 60 days, three analysts have revised their previous EPS estimates higher for the current fiscal year. PHM has beaten our consensus estimate in each of the last three quarters, so there’s a good chance that it could surprise us once again when it releases its next quarterly results in late October.

Bottom Line

The commercial and residential building industry currently stands among the top 30% of all 265 industries ranked by Zacks. This is important because stocks within the top half of all industries have a strong tendency to outperform the lower half by a wide margin.

The recent rise in the HMI index could suggest that there may be better things to come for the industry. If confidence stays elevated among home builders and the momentum is sustained, these stocks have a good chance to give your portfolio additional gains.

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