Keep the Focus on Low-Debt Homebuilders

Long Term Construction Stocks to Buy and Hold

Once again, we head into the week in negative market momentum conditions. I hope that we see the switchback in the coming days. But there are fundamental worries about the state of the U.S. economy moving forward. I’d tell you a joke about inflation right now, but I’m worried it would fall flat. Inflation challenges are here to stay. Even with lumber prices falling back to earth (remember that speculation), there will remain elevated prices due to supply chain bottlenecks, an employee shortage, and companies that contracted futures when prices were very high. Now is the time to look to long term construction stocks to buy and hold.

The speculation around the housing industry remains in focus. Prices are extremely elevated in a way that reminds me of 2007 (just without the extreme levels of speculation around credit default swaps and CDOs). There is a shortage of supplies. I’m selling my condo out in Chicago, and I have one of the few three-bedroom units under nosebleed levels within a mile of my area. A bidding war started yesterday. Treasury Secretary Janet Yellen is pushing for collaboration between the U.S. government and homebuilders to increase the supply of homes. That’s going to take a lot of work. 

Homebuilders Versus Supply Shortages

There needs to be a focus on reducing and streamlining the costs of labor, land, and lumber. But there are significant regulatory issues at hand. For example, thousands upon thousands of regulatory groups oversee the deployment of permits for housing projects around the nation. Unless the U.S. finds a way to limit the red tape, the problems will persist. 

I am always skeptical about efforts to deregulate anything. Regulation is about power. And every new regulation creates a new bureaucrat who fancies himself or herself essential to whatever small town in which they operate. So they fight tooth and nail to protect whatever small level of power and influence that they have. Getting rid of that job is never well-received by government officials. And you’re going to need to do this more than 10,000 or even 20,000 times to cut all that red tape. 

But we can talk more about affordable housing and cutting the costs of housing. And that’s where government subsidies come in. Countless bills at the state and federal level are moving to increase tax credits, loosen credit, and spur more housing projects. In addition, Freddie Mac and Fannie Mae are backing large grassroots programs to increase the supply of housing around the United States. 

I expect that we’re going to see housing as the big political push of 2022. Ahead of the election, affordable housing remains on everyone’s mind in the wake of COVID. We have eviction moratoriums ending. We have a strong need for more housing (especially where I am in Southern Florida), and we have a significant amount of political will. 

Long Term Construction Stocks to Buy and Hold

The most obvious candidates for longer-term Buy and Hold in the housing market are the companies engaged in affordable housing construction. Think Meritage (NYSE:MTH) and Cavco Holdings (NASDAQ:CVCO). And companies like Lennar (NYSE:LEN) and Pulte Group (NYSE:PHM) continue to generate a lot of attention given their attachment to construction in the Sun Belt. 

But today, I’m paying very close attention to the price trend of D.R. Horton (NYSE:DHI). The company has a rock-solid balance sheet with a Piotroski Score of 7 and an Altman Z Score of 5.61. That latter figure highlights the solid debt-to-equity it maintains at 0.35 and the strong margins. Apples to apples, it’s trading at a solid valuation (EV-EBITDA of just 8.2x) and a Forward PE Ratio of 8.2.

One of the other bonuses that I’m looking for in a strong trend stock is insider ownership. The Horton family is the company’s third-largest shareholder at roughly 8%. So, if the family is doing well, shareholders will be as well. That skin in the game is significant and a reason why I’m always paying attention to the insider buying and selling trends. 

Looking across the universe of Wall Street analysts, D.R. Horton has an average price target of more than $111. That figure represents a potential upside of nearly 30% from today’s price.

From a longer-term perspective, I like this stock’s price profile in the wake of its recent pullback. Now is the time to consider dollar-cost averaging on this stock if we see any economic turmoil. Housing represents a sector that will continue to perform well for investors in the future.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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