For the fourth straight month, builder sentiment for newly built homes rose in April due to a low supply of existing homes on the market.
The National Association of Home Builders/ Wells Fargo Housing Market Index rose one point to 45 for the month. While anything below 50 is considered negative, the reading is the highest since September. A year ago, the index stood at 77.
Further, the overall homebuilding and construction industry has gained about 26.80% year to date.
As a result of these developments, investors may be interested in finding opportunities among undervalued homebuilding and construction stocks that have predictable performances.
The Undervalued Predictable Screener, a Premium GuruFocus feature, determines whether a stock is undervalued or overvalued based on two methods: discounted cash flow and discounted earnings.
According to both methods, companies with a discount higher than zero are consider undervalued, while discounts below zero are considered overvalued. The companies’ predictability rates are then determined based on their historical performance over the past decade.
The screener also looks for companies with predictability ranks of at least four out of five stars.
Based on these criteria, a number of homebuilders qualified for the screener as of April 17, including M.D.C. Holdings Inc. (MDC, Financial), NVR Inc. (NVR, Financial), Taylor Morrison Home Corp. (TMHC, Financial), Installed Building Products Inc. (IBP, Financial) and Lennar Corp. (LEN, Financial).
M.D.C. Holdings
Shares of M.D.C. Holdings (MDC, Financial) are currently trading 75% below the DCF value of $150 and 86% below the discounted earnings value of $264.
The Denver-based home construction company has a $2.78 billion market cap; its shares were trading around $37.98 on Monday with a price-earnings ratio of 4.95, a price-book ratio of 0.89 and a price-sales ratio of 0.48.
The GF Value Line suggests the stock is modestly undervalued currently based on its historical ratios, past financial performance and analysts’ future earnings projections.
At 96 out of 100, the GF Score indicates the company has high outperformance potential. While it received solid ratings for growth, profitability, GF Value and momentum, the financial strength rank was more moderate.
It also has a five-star predictability rank. GuruFocus data shows companies with this rank return an average of 12.1% annually over a 10-year period.
Of the gurus invested in MDC Holdings, Jim Simons (Trades, Portfolio)’ Renaissance Technologies has the largest position with 0.38% of its outstanding shares. Ken Fisher (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), First Eagle Investment (Trades, Portfolio) and Barrow, Hanley, Mewhinney & Strauss also own the stock.
NVR
NVR (NVR, Financial) shares are trading 69% below the DCF value of $18,349 and 66% below the discounted earnings value of $16,935.
The company headquartered in Reston, Virginia, which builds single-family homes as well as town homes and condominiums, has a market cap of $18.46 billion; its shares were trading around $5,685 on Monday with a price-earnings ratio of 11.55, a price-book ratio of 5.22 and a price-sales ratio of 1.89.
According to the GF Value Line, the stock is fairly valued currently.
Driven by solid ratings for growth, profitability and financial strength as well as a moderate GF Value and momentum ranks, the company’s GF Score is 96. As such, NVR has high outperformance potential.
NVR also has a five-star predictability rank.
With 3.59% of its outstanding shares, Diamond Hill Capital (Trades, Portfolio) is NVR’s largest guru shareholder. Other guru investors include the Smead Value Fund (Trades, Portfolio), Tom Gayner (Trades, Portfolio), Simons’ firm, Steven Cohen (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio).
Taylor Morrison
Taylor Morrison (TMHC, Financial) is trading 68% below the DCF value of $120 and 88% below the discounted earnings value of $314.
The Scottsdale, Arizona-based homebuilder has a $4.13 billion market cap; its shares were trading around $38.17 on Monday with a price-earnings ratio of 4.19, a price-book ratio of 0.89 and a price-sales ratio of 0.53.
Based on the GF Value Line, the stock appears to be fairly valued currently.
The GF Score of 90 means the company has good outperformance potential on the back of high ratings for profitability, growth and financial strength. The momentum rank, however, was more moderate while the GF Value was low.
Further, the company has a four-star predictability rank. According to GuruFocus research, companies with this rank return, on average, 9.8% annually.
Donald Smith & Co. has the largest holding of Taylor Morrison with a 4.70% stake. Ken Fisher (Trades, Portfolio), Grantham, Charles Brandes (Trades, Portfolio), Chuck Royce (Trades, Portfolio) and several other gurus also have positions in the stock.
Installed Building Products
Shares of Installed Building Products (IBP, Financial) are trading 59% below the DCF value of $278, but 16% above the discounted earnings value of $97.
Headquartered in Columbus, Ohio, the company, which installs insulation for both residential and commercial builders, has a market cap of $3.16 billion; its shares were trading around $111.48 on Monday with a price-earnings ratio of 14.37, a price-book ratio of 6.40 and a price-sales ratio of 1.19.
The GF Value Line suggests the stock is modestly undervalued currently.
The GF Score of 95 is indicative of high outperformance potential. While the company received high ratings for three of the criteria, the financial strength and momentum ranks were more moderate.
Installed Building Products has a four-star predictability rank.
Holding a 4.45% stake, Ron Baron (Trades, Portfolio) is the company’s largest guru shareholder. The stock is also being held by Jones, Fisher, Cohen, Royce, Ray Dalio (Trades, Portfolio)’s Bridgewater Associates and Lee Ainslie (Trades, Portfolio).
Lennar
Lennar’s (LEN, Financial) stock is trading 43% below its DCF Value of $185 and 81% below its discounted earnings value of $555.
The Miami-based homebuilder, which targets first-time, move-up and active homebuyers, has a $29.80 billion market cap; its shares were trading around $104.73 on Monday with a price-earnings ratio of 6.49, a price-book ratio of 1.24 and a price-sales ratio of 0.89.
According to the GF Value Line, the stock is currently modestly undervalued.
The company has high outperformance potential with a GF Score of 94 due to solid profitability, growth and financial strength ranks, while the ratings for momentum and GF Value were more moderate.
The company is also supported by a 4.5-star predictability rank. GuruFocus says companies with this rank return an average of 10.6% annually.
Of the guru investors, the Smead Value Fund (Trades, Portfolio) has the largest stake with 0.86% of Lennar’s outstanding shares. Glenn Greenberg (Trades, Portfolio), Baron, Stanley Druckenmiller (Trades, Portfolio) and Grantham are other notable shareholders.
Additional opportunities
Other companies that qualified for the screener were Century Communities Inc. (CCS, Financial), Toll Brothers Inc. (TOL, Financial), M/I Homes Inc. (MHO, Financial), Meritage Homes Corp. (MTH, Financial), D.R. Horton Inc. (DHI, Financial) and PulteGroup Inc. (PHM, Financial).
