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What are we looking for?

U.S. home builder companies benefiting from an increase in demand for new homes amid the coronavirus pandemic.

The U.S. Pending Home Sales Index rose 5.9 per cent in July after an increase of 15.8 per cent in June, reaching the highest level since 2005. New home sales data for the United States this week showed the highest jump in almost 14 years with single-family home purchases increasing 13.9 per cent in July, according to Bloomberg.

The SPDR S&P Homebuilders ETF (XHB-NYSE Arca) is up 17.4 per cent year-to-date and 29.1 per cent over the past year. Rising prices and low inventory are helping boost home prices across North America. How much higher home prices can go if rates remain at historic lows is a continuing debate. For now, U.S. home builders have been trending higher, benefiting from low interest rates and the desire for families to upgrade during the coronavirus pandemic.

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The screen

We will be using Trading Central Strategy Builder to search for U.S. home builder stocks that are indicating double-digit return on equity and low debt levels.

We begin by dialling into the home building and construction sector. We search for home builders with a return on equity higher than 10 per cent. The screen will focus on stocks with a price-to-earnings ratio lower than 25 – better value than the average P/E in the sector, which is 28. Finally, to focus on companies with low levels of debt in case interest rates ever do start to rise again, we will filter to include only companies with debt-to-equity ratios of one or less.

For informational purposes, we have also included the market capitalization, recent stock price and dividend yield.

More about Trading Central

Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Its product suite provides actionable trading ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities. Strategy Builder is available through leading retail brokers in Canada and worldwide.

What we found

Eleven companies best meet the strategy criteria.

D.R. Horton Inc. is the largest home builder in the U.S. based on home closings and always seems to lead our home builders’ list. The company mainly builds single-family detached homes and offers products ranging from entry-level to luxury categories. It also offers home buyers mortgage financing and title agency services through its financial services segment. The company has the lowest debt-to-equity ratio on our list, at 0.39, and the third-highest return on equity, at 19.8 per cent. The stock has had an impressive year-to-date performance, gaining 40.4 per cent.

LGI Homes Inc. is engaged in the design, construction and sale of entry-level homes, including both detached homes and town homes. The company has the highest return on equity on our list at 25.9 per cent. The stock has also had the best year-to-date performance, up 62.6 per cent and hovering near record highs.

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PulteGroup Inc., one of the largest home construction companies in the U.S., posted a new record high this week. The company has the second-highest return on equity on our list at 21.1.

Trading Central Strategy Builder provides a backtesting 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 an average annual return of 20.3 per cent compared with a gain of 11.3 per cent for S&P 500 on the same basis.

The investment ideas presented here 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.

Select U.S. home builder stocks

RankCompanySymbolMkt. Cap. (US$ Bil.) P/ED/E RatioROE (%)YTD Perf. (%)1Y Perf. (%)Div. Yld. (%)Recent Price (US$)
1D.R. Horton Inc.DHI-N26.913.40.3919.840.451.20.973.84
2Lennar Corp.LEN-N23.511.70.5413.138.353.00.776.95
3PulteGroup Inc.PHM-N12.410.90.5221.119.338.51.046.32
4Meritage HomesMTH-N3.811.60.5017.364.855.6n/a100.28
5LGI Homes Inc.LGIH-Q23.513.80.6525.962.645.7n/a113.98
6TRI Pointe GroupTPH-N2.39.20.6812.614.629.2n/a17.73
7KB HomeKBH-N3.611.40.7212.97.530.51.036.79
8Century Comm.CCS-N1.38.50.9914.338.937.8n/a37.71
9M.D.C. HoldingsMDC-N2.810.90.6514.916.419.82.944.95
10M/I Homes Inc.MHO-N1.37.70.7616.613.924.8n/a44.31
11Toll Brothers Inc.TOL-N5.713.80.9810.

Source: Trading Central

Gary Christie is head of North American research at Trading Central in Ottawa.

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