Dorothy said it best: "There's no place like home." Even if you're an active investor in the stock market, chances are your home is your most valuable asset and single largest purchase. That makes the housing sector crucial to the equity markets and overall economy.
Housing sector data has been mostly positive this year, a tailwind that boosts consumer confidence and by extension GDP growth. Notably, housing starts are on an upward trajectory, reaching 778,000 this week as opposed to 764,000 a month ago and 733,000 a year ago.
Below, we examine an undervalued housing-related stock that's given short shrift by investors, and yet it's poised for market-beating gains this year.
Interest rates play a key role in housing, of course. Investors today will be scrutinizing the remarks of Federal Reserve Chair Janet Yellen, as she holds a discussion about interest rates at an event at Harvard University. You can expect Yellen's remarks to be characteristically oblique, but the Fed has already indicated that it will hike rates again at its next meeting in June, if warranted by the pace of economic growth.
Worried about rising rates? Don't be. A modest interest rate increase would still leave rates at extremely low levels and do little to derail the housing sector's long-term momentum. Investors are wisely betting on a sustained housing recovery, but they're piling into the obvious choices, such as Home Depot or its chief competitor Lowe's, bidding up their share prices to high valuations.
To be sure, Home Depot and Lowe's are terrific stocks to own, but here's an even better value play right now: Miami-based Lennar Corp. (LEN) - Get Report , the nation's third-largest homebuilder by revenue.
Lennar is scheduled to release its next operating results on June 23. The analyst consensus is that Lennar will report earnings-per-share (EPS) of 87 cents, compared to 63 cents in the same quarter a year ago, for a year-over-year gain of nearly 39%. In this truly lousy earnings season, EPS growth of that magnitude stands out.
LEN shares now trades just above $45; the average analyst one-year price target is $54.86, for a gain of nearly 21%. And yet LEN's trailing 12-month price-to-earnings ratio (P/E) is only 12.66, compared to 23.55 for Home Depot, 26.68 for Lowe's, and 29.24 for the industry.
Lennar operates in 18 states via six divisions: Homebuilding East, Homebuilding Central, Homebuilding West, Homebuilding Southeast Florida, Homebuilding Houston, and Homebuilding Other.
The company also offers real estate related financial services, including mortgage financing and closing services for home buyers. This diversity provides additional revenue streams, which makes the company more stable during cyclical ups and downs.
Buy this cheap stock now, before sanguine housing data combined with a robust earnings report push up its price.
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John Persinos is editorial manager and investment analyst at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.