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What are we looking for?

Shares of home builders have enjoyed a strong 2015 thanks to an improving job market, robust consumer confidence, and near-zero interest rates. My colleague Rob Belanger and I are taking a look at the sector.

The screen

We started with North American companies larger than $500-million (U.S.) in market capitalization and sorted them from the largest to the smallest.

The EV/EBITDA (enterprise value divided by earnings before interest, taxes, depreciation, and amortization) is one of the most commonly used valuation metrics. We are looking for a low number. Enterprise value comprises market capitalization, plus debt, minority interest, and preferred shares, minus cash and equivalents.

Revenue growth for the past 12 months had to be greater than 5 per cent.

The value of homes closed in the latest quarter are homes where the title has passed from the builder to the purchaser.

We are showing the value of homes in backlog in the latest quarter. Backlog is the number of homes contracted but not closed.

The number of lots controlled equals land inventory plus any options to purchase land in the future and does not include the backlog.

Operating margin (OM) is a measurement of what portion of a company's revenue is left over after paying for variable costs, such as wages and inventory. If a company has an operating margin of 12 per cent it means that it makes 12 cents before interest and taxes for every dollar of sales. We only included companies where the OM is greater than 5 per cent. We are also showing the average closing price in the last quarter.

What did we find?

Ryland Group operates in 17 U.S. states and has the best EV/EBITDA on our screen. Founded in 2009, TRI Pointe homes builds in California and Colorado and shows a phenomenal revenue growth.

Toll Brothers has the highest average closing price in the last quarter, and D.R. Horton has the lowest. The only company listed in Toronto, and in the U.S., is Brookfield Residential Properties, which heads the list in the OM.

Investors should consult an investment professional or conduct further research before buying any of these companies.

Michael Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high-net-worth clients.

North American home builders