Economists anticipate low mortgage rates, stronger job growth, and lower gas prices to foster new-home sales growth of 5% to 7% in the next year versus the roughly 5% decline in new homes sales in 2014, said Lawrence Yun, chief economist with the National Association of Realtors.
"There is a significant need for greater activity in the next year in the housing sector and it's positioned well for growth," Yun said. Home sales fell to a seasonally adjusted rate of 4.93 million in November from 5.25 million in October, but up 2.1% from November 2013 sales, according to a National Association of Realtors report released today.
Homebuilders such as Lennar (LEN) , with strong positions in job-growth states such as California, Arizona, Nevada, Texas and Florida, are best positioned to benefit from a housing market rebound, says Robert Wetenhall Jr., managing director for equity research at RBC Capital Markets.
"The multifamily construction business, mortgage finance and private equity funds represent a source of hidden value that aren't full priced into the stock," Wetenhall told TheStreet. He said those factors combined should generate "visible earnings" for Lennar in the second half of 2015.
Lennar, which provides refinancing and mortgage services, plans to invest $375 million in the next four years into geographically diverse, multifamily properties with an estimated value of $5 billion. Shares are trading toward the top of a 52-week range of $16.56 to $22.03.
"We like D.R. Horton's focus on aggressively driving asset returns in both reducing risk by selling inventory and generating strong ROE [return on equity] performance," Wetenhall said. "We think the market's appreciation of this strategy and strong earnings growth essentially leads to a higher share price."
Texas-based DR Horton, which has about 60,000 finished lots to meet demand for the next two years, last month reported revenue of $2.4 billion for the fiscal fourth quarter, up from $1.8 billion a year prior and in line with Street expectations. Net income was 45 cents per share, short of the 49 cents per share analyst consensus, according to Capital IQ estimates.
And Pulte, based in Atlanta, offers homes targeting first-time buyers, move-up buyers and active adult customers. Pulte's third-quarter earnings of 37 cents per share beat expectations for 36 cents per share while revenue of $1.6 billion was in line. RBC Capital Markets recently raised its price target on Pulte to $22 per share from $19 while maintaining an outperform rating.
"Pulte's success lies in management's focus on maximizing return on investor capital," Wetenhall said. "This is done through a strategy that balances gross margin performance, fast inventory turnover and a thoughtful approach to capital allocation."
Meanwhile, some analysts have a more cautious approach to homebuilding stocks in 2015. James Krapfel, equity analyst for Morningstar, said he believes many builder stocks are fairly or overvalued, but he said some stocks are standouts for those who want to tap into a housing market recovery. Washington D.C.-area's NVR (NVR) is his pick for the best builder stock for 2015.
"NVR is the best among the builders as far as best ROIC [return on invested capital], capital allocation, strategy of using their substantial free cash flows to buy back shares," Krapfel said. He said buying NVR stock during a correction, down about 5% from today's price of about $1,231.25, would "be something for investors to get excited about."
NVR's third-quarter net income and revenue improved from the year-ago period, but were slightly off the consensus view. NVR reported $20.70 per share in earnings, up from $17.67 a year prior, while revenue was $1.20 billion, up from $1.19 billion. The Street expected $10.81 per share on $1.26 billion in revenue.
TheStreet rates D.R. Horton, Lennar, NVR and Pulte at buy.
TheStreet Ratings team rates LENNAR CORP as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:
"We rate LENNAR CORP (LEN) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance, attractive valuation levels, good cash flow from operations and compelling growth in net income. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."
You can view the full analysis from the report here: LEN Ratings Report