Chronicle Journal: Finance

3 Residential Construction Stocks to Avoid as Sales of New Homes Drop

Housing has been one of the strongest parts of the economy but its momentum is beginning to slow as homebuilders grapple with rising prices and slowing demand. Below, we provide a look at three residential construction stocks investors should avoid as the housing market begins to cool. Those stocks are as follows: Toll Brothers (TOL), NVR (NVR), and D.R. Horton (DHI).0

The housing market is cooling off as demand falls with rising prices. This is not surprising based on recent earnings report from homebuilders.

Sales of new homes in the United States declined in June, dropping down to the lowest level since the initial month of the ongoing pandemic. It is clear many of those interested in buying a home are now willing to wait out the market. It is quite possible the end to the nationwide eviction ban and the mandatory resumption of mortgage payments will move the pendulum back in favor of homebuyers.

The plain truth of the matter is home prices increased much too quickly, largely because so few homes were on the market this past year. If the pandemic ends at some point in the second half of 2021, homeowners will feel more comfortable selling, ultimately bringing the housing market back to equilibrium. Below, we provide a look at three residential construction stocks investors should avoid as the housing market begins to cool. Those stocks are as follows: Toll Brothers (TOL), NVR (NVR), and D.R. Horton (DHI).

TOL

TOL constructs single-family and attached home dwellings. The company also builds master-planned luxury communities and high-rise communities. These buildings are primarily constructed on land owned and developed by TOL. TOL’s communities are located in more than half a dozen states. The stock has a forward P/E ratio of 10.06. TOL's beta is 1.54.

TOL has a D POWR Rating. The stock has Cs in the Growth, Stability, Value, and Momentum components of the POWR Ratings. Click here to find out how TOL fares in the Quality and Sentiment components of the POWR Ratings.

Of the 24 stocks in the Homebuilders segment, TOL is ranked second last, slotting in at number 23 overall. Investors who would like to find out more about the stocks in this space can do so by clicking here.

Though one analyst has set a target price of $85 for the stock, the majority of those who have analyzed it view it as a Hold. Of the 13 analysts to have issued recommendations for the stock, two view it as a Strong Buy, five view it as a Buy, and six view it as a Hold.

NVR

NVR is trading at a whopping $5,095 per share. The stock's forward P/E ratio of 14.67 is a bit higher than that of TOL. The stock is currently trading about $200 below its 52-week high of $5,308.48.

NVR has a C POWR Rating grade. The stock has Bs in the Quality and Sentiment components of the POWR Ratings. However, NVR has a D Value component and a C momentum component. Click here to find out how NVR fares in the Stability and Growth components of the POWR Ratings.

Of the 24 publicly traded companies in the Homebuilders space, NVR is ranked 9th. However, this industry as a whole has a C POWR Rating grade. You can learn more about homebuilder stocks by clicking here.

It is concerning that of the six analysts who have issued NVR recommendations, four consider it a Hold and only two consider it a Buy.

DHI

DHI has a C POWR Rating grade. The stock has Cs in the Growth, Stability, Value, and Quality components of the POWR Ratings. You can find out how DHI fares in the Momentum and Sentiment components of the POWR Ratings by clicking here.

Of the two dozen stocks in the Homebuilders segment, DHI is ranked exactly in the middle. Investors who would like to learn more about the stocks in this segment can do so by clicking here.

DHI has a forward P/E ratio of 8.67. The stock has a beta of 1.64. Though this is not an extremely high beta, it is a bit concerning considering the fact that plenty of other stocks in the space are less volatile.

In the past 11 months, DHI's average analyst recommendation declined by 0.32. If you own DHI, consider selling some of your position or even shorting the stock.


DHI shares were trading at $96.12 per share on Friday morning, up $0.61 (+0.64%). Year-to-date, DHI has gained 40.08%, versus a 18.27% rise in the benchmark S&P 500 index during the same period.



About the Author: Patrick Ryan

Patrick Ryan has more than a dozen years of investing experience with a focus on information technology, consumer and entertainment sectors. In addition to working for StockNews, Patrick has also written for Wealth Authority and Fallon Wealth Management.

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