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Big-name investors are saying buy U.S. stocks.
Famed investor Bill Miller has said that there’s no reason to be bearish on the U.S. stock market. Driving the continued growth in the U.S. market should be its strong economy and low interest rates, according to Miller. The bond markets are yielding next to nothing, but several high-quality companies are trading at cheap valuations.
Another big-time hedge fund investor, Leon Cooperman, has agreed, saying that the August sell-off isn’t the end of the bull market. Cooperman is expecting a more stable environment in the oil markets and Chinese stock market. Like Miller, he voices a similar sentiment that valuations remain reasonable.
One of the few bright spots in the current market is the housing sector.
The homebuilding industry is doing so well that it’s seeing a shortage of labor and land. The other beauty of U.S. homebuilders is that they generate the majority of their revenues from within the United States. Investing outside the U.S. has been tough, given the strong dollar and weak global demand.
But homebuilders have a variety of tailwinds, including housing starts in September, which were up 6.5% to 1.21 million units. This was the sixth straight month that housing starts were over 1 million units.
Existing home sales in September were also solid. Sales in September were running at a 5.55 million annual rate – above the 5.39 million estimate. That was also well above the 5.3 million figure from August.
What could drive the homebuilding industry even higher? A return of first-time homebuyers to the market.
First-time homebuyers made up 29% of home sales last month. We’re getting to a point where it makes more sense to buy instead of rent.
With all that in mind, here are the top three homebuilding stocks to own today:
Toll Brothers (NYSE: TOL)
Toll Brothers trades at just over 13 times next year’s sales estimates, which makes it one of the cheaper stocks in the industry. Shares are down 9% over the last three months.
Recently, quarterly results for Toll were worse than expected because of elevated selling and administrative expenses and costs related to selling non-core lots. However, longer term, Toll is interesting.
The average contracted home sales price for Toll Brothers was up to $834,000 last quarter – the highest in the company’s history. Its backlog is more than impressive – it’s up to $3.7 billion after rising nearly 20% last quarter. This should be good enough to support the company until we see the next key catalyst in homebuilding kick in.
NVR Inc. (NYSE: NVR)
Shares of NVR are one of the bright spots of the industry, with shares up 28% year-to-date. It also has with a near 18% return on invested capital, which is industry tops.
Third-quarter earnings were impressive, with revenues up 16% on a 4% increase in sales prices and 11% rise in home closings. NVR’s backlog was up 15%. Its mortgage banking operations are also hitting on all cylinders.
The beauty of NVR is that it has an asset and land-light model. This involves buying finished lots from land developers rather than doing speculation building. This has helped it maintain superior returns over the long term. Since 2002, NVR has averaged a return on invested capital of nearly 50%.
PulteGroup (NYSE: PHM)
Shares of PulteGroup are down 17% year-to-date after reporting a weak quarter earlier this month. A stock that’s trading at less than 12 times next year’s earnings estimates makes PulteGroup one of the cheapest homebuilding plays around.
Again, some of PulteGroup’s hiccups have been related to labor shortfalls and weather issues. Longer term, its rise in backlog should support new order unit volume. It has also become conservative since the last financial crisis, cutting speculation building and refraining from spending on land. The move signifies a shift from a growth focus to a returns one.
PulteGroup is also Bill Miller’s largest position.
The homebuilding industry looks to be the best bet on the U.S. economy, with the opportunity to take advantage of the recent sell-offs.
(Speaking of homes, did you know you could collect thousands of dollars in “rent” checks – without even owning one? No joke. Find out how right here.)