Second bite of the cherry for investors in this sector

by Rodney Hobson from interactive investor |

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After previous success here, our overseas investing expert spots another possible buying opportunity.

North American housebuilders have recorded some of the biggest share price gains over the past six months. Investors should be considering whether now is the time to take profits, or if there is still more upside in the sector.

This is a tough call, even though there are many factors favouring continued demand for housing in the continent, especially in the US. Total US employment increased by 1.4 million in August, while the unemployment rate dropped for the fourth consecutive month, and quite heavily at that from 10.2% in July to 8.4%.

Economic activity in manufacturing improved and new orders for durable goods, defined as products designed to last for at least three years, jumped 11.2% in July, the highest level in more than 14 years, with a further rise expected in August. 

With prospects of more Americans getting back to work after the spring traumas, it looks likely that workers can once again afford to buy their own homes. The debacle of sub-prime mortgage lending that sparked the financial crisis of 2008 now looks to be a distant memory.

Sales of new houses are shooting ahead. In July, the latest month for which figures are available, sales were up 13.9% on June and 36.3% from July last year. Construction is back to pre-coronavirus levels.

On the negative side, Covid-19 continues to sweep through the southern belt, and the country faces the uncertainty of a very divisive presidential election. While neither Republicans nor Democrats want to be accused of sabotaging the recovering economy, there is no sign of consensus on what needs doing, with President Trump favouring tax cuts and rival Joe Biden calling for more government spending.

The high and growing level of US government debt will remain a cloud over the economy, but the reckoning is a long way off and may well be delayed if the presidential winner sticks to a policy of making the budget deficit wider still. However, either proposal will stimulate further short-term growth, which will have a further favourable knock-on effect for the housing sector.

Housebuilders took a big hit in the general stock market slump in February-March, but shares have raced away since. They have been slipping of late, though, opening up a possible buying opportunity, albeit nothing like as good as the one that beckoned six months ago.

DR Horton (NYSE:DHI) is the biggest player. Its shares slumped from $62 to $29 but have recently peaked at $77. It’s a similar story at rivals such as Lennar (NYSE:LEN), NVR (NYSE:NVR), Toll Brothers (NYSE:TOL), KB Home (NYSE:KBH) and Taylor Morrison (NYSE:TMCH) as the table shows.

Housebuilder Share price pre-Covid ($) Share price at bottom ($) Share price post-Covid peak ($) Share price 8 Sept 2020 ($)
DR Horton 50.99 28.78 76.97 68.01
Lennar 59.35 29.35 79.36 73.37
PulteGroup 46.69 17.74 47.62 43.19
NVR 3,750 2,175 4,310 3,916
Toll Brothers 34.42 13.8 46.05 41.74
KB Home 29.5 11.06 37.99 34.08
Taylor Morrison 18.81 7.05 25.99 22.89

Source: interactive investor 

PulteGroup (NYSE:PHM) is a slightly different case. Although the overall pattern is similar, its shares barely recovered to pre-coronavirus levels and now languish at a lower level. As with most US stocks, there is little in the way of dividends. Horton, PulteGroup, Toll Brothers and KB Homes all offer just over 1%, Lennar half that.

Hobson’s Choice: In April, I recommended Taylor Morrison, Lennar, KB Homes and Horton at much lower levels than they are now. It would not be wrong for those with a short timeframe to take decent profits, but I would be inclined to stay in. PulteGroup and Toll Brothers in particular look oversold.

 

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

Please note that our article on this investment should not be considered to be a regular publication.

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