Housing

Despite Rising Rates, 5 Top Homebuilders to Buy Could Have a Big 2017

Lee Jackson

Published: December 30, 2016 8:35 am

Last Updated: January 12, 2020 4:17 pm

With the first interest rate increase in a year past us, most on Wall Street are expecting anywhere from four to five increases between now and 2019. While investors may think that could hurt the homebuilder stocks, one firm we cover is reasonably bullish on some of the top companies in the industry. With underwriting standards somewhat looser, and the 2015 reduction in FHA mortgage insurance premiums providing a tailwind, 2017 may prove to be a very good year for investors that own the homebuilders.

In a new research report, Wedbush analysts are reasonably positive on the segment and feel investors should focus on the more liquid companies. They said this in the report:

The primary catalysts of housing demand (jobs and consumer confidence) are trending positively. Competition from existing homes for sale has been slim in the Top 25 markets, and we do not see a catalyst to change that trend. Mortgage availability in spring 2017 should be better than in spring 2016 due to a relaxation of mortgage lending standards (lower minimum credit scores and exceptions to the 43% debt-to-income limits) by the Government sponsored entities mid-2016.

The firm has six companies rated Outperform, and here we focus on five of the best known.

Century Communities

This company is focused on building homes in some of the fastest growing markets in the country. Century Communities Inc. (NYSE: CCS) is involved in the development, design, construction, marketing and sale of single-family attached and detached homes, as well as acquisition, entitlement and development of land. The company sells homes through its sales representatives, as well as through independent real estate brokers.

Century Communities builds single-family homes, townhomes and flats that incorporate high-merit designs and proficient craftsmanship in the posh areas of Colorado, Georgia, Nevada, Texas and Utah. Further, it is the parent company of Jimmy Jacobs Homes and Grand View Builders.

The Wedbush price target for the stock is $30, and the Wall Street consensus target is at $25.50. The stock closed most recently at $21.30 a share.

D.R. Horton

This top company is one of the highest volume builders in the United States. D.R. Horton Inc. (NYSE: DHI) is the largest public builder by closings in the country, delivering roughly 37,000 homes in fiscal 2015. It is positioned in 78 metropolitan markets in six major regions and develops single-family homes for first-time and move-up buyers.

Approximately 75% of revenue is derived from the Southeast, South Central and West regions. The company also provides mortgage financing and title agency services to homebuyers. The Wedbush team likes the liquidity and size of a builder like D.R. Horton, as the company has a market capitalization of over $10 billion.

Shareholders are paid a 1.45% dividend. Wedbush has a $36 price target for the stock, and the consensus target is at $34.11. Its shares closed trading on Thursday at $27.53 apiece.

KB Home

This is another well-known company that the Wedbush team is positive on. KB Home (NYSE: KBH) is one of the largest homebuilders in the United States, with roughly 2% market share. The company builds single-family homes, townhomes and condos for first-time, move up and active adult buyers.

KB Homes is positioned in roughly 40 markets, with around 70% to 75% of revenues attributable to the West and Central regions. KBH also provides mortgage services through a joint venture with Nationstar. Founded in 1957, and the first homebuilder listed on the New York Stock Exchange, the company has built nearly 600,000 homes for families from coast to coast. Distinguished by its personalized homebuilding approach, KB Home lets each buyer choose their lot location, floor plan, décor choices, design features and other special touches that matter most to them.

Shareholders in KB Home are paid a small 0.62% dividend. The $22 Wedbush price target is well above the consensus price objective of $16.83. Shares closed near that level yesterday at $16.04.

M/I Homes

This is a smaller company that may be a touch off investors radar screens. M/I Homes Inc. (NYSE: MHO) operates as a builder of single-family homes in Ohio, Indiana, Illinois, Minnesota, Maryland, Virginia, North Carolina, Florida and Texas. It operates through Midwest Homebuilding, Southern Homebuilding, Mid-Atlantic Homebuilding and Financial Services segments. The company designs, constructs, markets and sells single-family homes and attached townhomes to first-time, move-up, empty-nester and luxury buyers under the M/I Homes and Showcase Collection brand names.

The company also purchases undeveloped land to develop into developed lots of single-family homes, as well as for sale to others. In addition, M/I Homes also originates and sells mortgages, and it serves as a title insurance agent by providing title insurance policies, examination and closing services to purchasers of its homes.

Wedbush has set its price objective at $28 a share, and the consensus target price is $28 as well. The shares closed most recently at $25.58.

TRI Pointe

This is a smaller cap company focused on building in fast-growing areas. TRI Pointe Group Inc. (NYSE: TPH) engages in the design, construction and sale of single-family attached and detached homes in the United States. It also develops and sells land and lots.

The company operates a portfolio of six brands across eight states, including Maracay Homes in Arizona, Pardee Homes in California and Nevada, Quadrant Homes in Washington, Trendmaker Homes in Texas, TRI Pointe Homes in California and Colorado, and Winchester Homes in Maryland and Virginia.

The company also offers financial services, such as mortgage financing and title services. TRI Pointe sells homes through its own sales representatives and independent real estate brokers.

The Wedbush target price for the shares is $17. The consensus price objective is listed at $16.89. The stock closed yesterday at $11.75.

These five top companies all are in areas that for the most part are experiencing solid growth. With the potential for economic and job growth on the horizon, and also tax cuts on the table, all these companies could have a positive 2017 and beyond.