When the mortgage collapse happened over 10 years ago, one headline that was truly discouraging at the time was that the American dream of owning a home was dead and would never return. Not only has that notion been tossed in the dumpster fire of bad advice, but with some of the lowest interest rates in 50 years still around, one of the best sectors to buy now may be the homebuilders.
Housing starts in May were 1.350 million on a seasonally adjusted annual rate basis (SAAR), and that was up 20% year over year and 2% above consensus of 1.320 million. The SAAR reading was up 5% from April’s rate of 1.286 million, which was minimally revised. May’s SAAR reading set a new recovery high.
Those kinds of numbers are incredibly bullish for the top homebuilders. We screened the Merrill Lynch homebuilders research universe and found four companies that are among the biggest and the best in the business. Shares of all are rated Buy at Merrill Lynch, and the analysts have massive price targets.
D.R. Horton
This is one of the highest volume builders in the United States and a top pick at Merrill Lynch, also residing in the firm’s US 1 list. D.R. Horton Inc. (NYSE: DHI) is the largest public builder by closings in the country, delivering roughly 40,000 homes in 2016. It is positioned in 78 metropolitan markets in six major regions. It develops single-family homes primarily for first-time and move-up buyers.
Approximately 80% of revenue is derived from the Southeast, South Central and West regions, three areas of the country that continue to see huge growth. The company also provides mortgage financing and title agency services to homebuyers.
Shareholders receive a 1.2% dividend. The Merrill Lynch price target for the stock is $74, but the Wall Street consensus target is just $55.45. The shares closed trading on Wednesday at $41.78.
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Lennar
This is the other top pick at Merrill Lynch, and it is well set in the entry-level market. Lennar Corp. (NYSE: LEN) is the second largest public homebuilder by closings in the United States, delivering over 29,000 homes in 2017.
The company is well positioned in 18 states in four major regions targeting first-time, move-up and active adult buyers. Lennar has diversified its core homebuilding operations with the addition of real estate investment and management, multifamily and single-family and commercial real estate development in California. The company also owns a financial services business.
In addition, Lennar also announced last year it would merge with CalAtlantic group, which it acquired for $51.34 a share.
Lennar investors receive a minuscule 0.31% dividend. Merrill Lynch has a $90 price target, and the consensus target is $76.53. The stock closed Wednesday at $52.23.
PulteGroup
This is another top company with a wide product portfolio. PulteGroup Inc. (NYSE: PHM) is one of the largest public homebuilders in the United States, delivering over 21,000 homes in 2017. The company is also well-positioned in approximately 50 markets in 26 states, targeting the first-time, move-up and active adult buyer groups.
PulteGroup primarily builds single-family detached homes, although it also constructs townhouses, condominiums and duplexes. The company owns a captive financial services business that provides mortgage financing, title, insurance and closing services.
Pulte Homes investors are paid a 1.23% dividend. The $44 Merrill Lynch price objective compares with the consensus price target of $35.82 The shares closed Wednesday at $29.38.
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Toll Brothers
This company is more focused on the higher end of the market, and business remains good. Toll Brothers Inc. (NYSE: TOL) is a leading U.S. homebuilder with a focus on luxury suburban and urban markets. It operates in four distinct geographic segments, building homes catering to move-up, empty-nester, active-adult and second-home buyers.
Toll Brothers has entered into various joint ventures to develop land or high-rise construction projects. More than 45% of the company’s sales are attributable to the Northeast and Mid-Atlantic regions.
Shareholders receive a 0.73% dividend. The Merrill Lynch price target is $62. The consensus target is $50.29, and shares closed Wednesday at $37.40.
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These four stocks have big upside to the Merrill Lynch targets. With the mortgage interest levels raised in the tax reform plan, the great majority of the homes sold by these companies will be eligible for the deduction. In addition, even if rates continue to rise, mortgages will still remain at very reasonable levels, especially for 30-year paper.
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