Although the broader stock market sold off aggressively Thursday (the S&P 500 fell 2.5%), one industry was under particular pressure: the homebuilders. Shares of PulteGroup (click ticker for report: ), Lennar (click ticker for report: ), KB Home (click ticker for report: ), Toll Brothers (click ticker for report: ), DR Horton (click ticker for report: ), and Ryland (click ticker for report: ) all suffered declines of at least 5%.
Homebuilding stocks have greatly benefitted from improving housing trends, but share prices had moved well ahead of the respective firms’ fundamentals. In our housing market industry overview released late May, we mentioned that homebuilding valuations looked particularly stretched. The group’s elevated prices coupled with the potential for the Federal Reserve to taper its bond purchases resulted in significant selling pressure across the industry.
Though the market is clearly worried about the impact of tapering, the fundamentals driving the housing market remain solid. Not only are rents sky-high in many markets, but we’re seeing an acceleration in household formation. We experienced excess supply during the previous decade, but the housing market crash largely reversed the trend of overbuilding. The inventory situation in many markets has substantially improved.
See: The Impact of the US Housing Recovery Cannot Be Underestimated
Valuentum’s Take
With the announcement of potential Fed tapering weighing on the markets, we weren’t surprised to see the homebuilders sell off. We thought share prices were well ahead of their respective fundamentals, and that remains mostly the case in the industry. We still do not believe any homebuilder looks attractive enough to be included in the portfolio of our Best Ideas Newsletter at the time of this writing. KB Home currently registers the worst score of a 1 on our Valuentum Buying Index.
Our favorite housing-related plays in no particular order: Whirlpool (WHR) thanks to higher appliance sales, United Technologies (UTX) via its residential HVAC exposure (indirectly, we like its aerospace exposure, too), Louisiana Pacific (LPX) on valuation, Ford (F) due to increased contractor activity, and diversified financials exposure: Financial Select SPDR ETF (XLF) and the SPDR S&P Banks ETF (KBE) due to enhanced loan performance and capital markets activity.