What are we looking for?
U.S. home-builder stocks with attractive valuations in a sector that has been outperforming the broad U.S. market.
The SPDR S&P Homebuilders ETF (XHB-NYSE) is up 39.5 per cent year-to-date as it holds near record highs this month. Housing is strong in the United States and the market is reflecting it. Is there still value to be found in a booming home building sector?
We will be using Trading Central Strategy Builder to search for U.S. home-builder stocks that have good valuations combined with strong return on equity and low debt levels.
We begin by searching for stocks exclusively in the home building and construction sector.
We want companies with a strong return on equity ratio of 10 per cent or more to see how effective management has used invested capital to generate income. The screen will also focus on stocks with a price-to-earnings ratio lower than 14 in order to find below-average valued companies when compared with the average P/E of the S&P 500 index, which sits at around 20.
To focus on companies with low levels of debt in case interest rates start to rise again, we will also filter to include only companies with debt-to-equity ratios of one or less. The higher the ratio, the more leveraged the company is.
Finally, we require a minimum market capitalization of US$2-billion because of the greater stability and safety larger companies offer.
We have also included annual dividend yield, year-to-date and one-year return with a requirement of positive performance.
More about Trading Central
Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Trading Central’s product suite provides actionable trading ideas based on technical and fundamental research covering stocks, exchange-traded funds, indexes, forex, options and commodities. Strategy Builder is available through leading retail brokers in Canada and around the world.
What we found
At the top of our list is D.R. Horton Inc., a leading home builder in the United States. The company also offers home buyers mortgage financing and title agency services through its financial services segment. D.R. Horton has the largest market cap on our list at US$19.9-billion and the second-lowest debt-to-equity ratio, at 0.4. The stock has been in an up-trend since the start of the year and remains near record highs that were reached this month.
Toll Brothers Inc. is the leading luxury home builder in the United States. The stock price has rebounded from lows in November, 2018, after being in a downtrend for all of 2018. Toll Brothers has the lowest P/E ratio in our list at 8.6 per cent and an impressive return on equity of 14.8 per cent.
Trading Central Strategy Builder provides a back-testing capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had a 15.9-per-cent annualized return compared with 8.6 per cent for the S&P 500.
The investment ideas presented below are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.
Gary Christie is head of North American research at Trading Central in Ottawa.
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