“They’re not as strong as they once were,”. MKM Partners’ Chief Market Technician, JC O’Hara said that, homebuilding stocks have been the “best charts coming out of the March 2020’s low” but now, their positive momentum is experiencing a halt as the trend turned ‘flat’ and continues to move sideways.
“If you look at the performance of a bunch of these home builders, they’re basically flat since August while the overall market’s up 10%.” said O’Hara in a CNBC interview.
However, O’Hara said that he ‘really likes’ housing stocks and he thinks that they can still continue to move up despite being in a losing trend and are not attractive from a technical perspective as of the moment.
O’Hara presented a chart showing the S&P 1500 Homebuilders Index versus the XHB. “We could see recently the basket of housing stocks has really started to outperform the builders.” He mentioned names like Floor & Decor Holdings Inc. (NYSE: FND), Tempur Sealy International Inc.(NYSE: TPX), and Terex Corporation (NYSE: TEX), as stocks from this category that are ‘about to breakout’ and could potentially generate a decent amount of gains. “I believe overall, housing is still a great theme for 2021, but I would just rather play that theme through housing stocks, not necessarily the pure homebuilders,” he marked.
As for Strategic Wealth Partners’ Mark Tepper, “I like the overweight D.R. Horton, the underweight Pulte concept,”. Mark said that D.R. Horton (NYSE: DHI) is his favorite homebuilder. According to him, there are 3 major key trends that are moving the housing market. “You’ve got the geographical trend, which is people moving from cities to suburbs, you’ve got the generational trend, which is the millennials buying their first homes, and then you’ve got the work-from-home trend,” he marked while adding that people are spending ‘more time’ at home which leads them to want their homes to be nicer, bigger and newer.
Tepper stated that first-time buyers will suit D.R. Horton’s specialty which is affordable entry-level homes, that actually meet the 3 major trend criteria he mentioned. “The number one thing you need when you build a house is the land to build it on and D.R. Horton’s land strategy really helps them,”.
On the other hand, PulteGroup Inc. (NYSE: PHM) is struggling to generate new communities as of the moment said Mark. According to him, it is already in a “move-up category” that is a bit ‘expensive’ and as a result, it ends up losing the Millennial first-time home buyers.
Talking about derivatives, Mark announced that they own shares of Mohawk Industries Inc. (NYSE: MHK). “Mohawk is the world’s largest flooring manufacturer, and it’s really like a catch-up trade on housing… They had this lawsuit overhang which was a drag on the stock. That’s fully priced in. That’s old news. So, I think you have the opportunity for some catch-up there.”
On a final note, Mark also highlighted Rocket Companies Inc. (NYSE: RKT), the parent of U.S. mortgage lender Quicken Loans. “It is the biggest pure-play mortgage lender and Rocket has the best technology. It’s kind of a fintech way of playing the housing boom. It’s the easiest, most frictionless way for a consumer to get a mortgage, and as long as interest rates stay low, there’s going to be a lot of demand for new mortgages.” he concluded.
At Insider Monkey we don’t use charts to identify the best stocks to buy. We use hedge fund sentiment data as our starting point to identify potentially lucrative trades. We believe Federal Reserves’ current policy is pushing investors into stocks and real estate. You can get a 30-year jumbo mortgage for under 2.7%. So, we decided to identify the best housing/homebuilder stocks to buy now according to hedge funds. We started with the holdings of SPDR S&P Homebuilders ETF’s (XHB) holdings and identified the 11 most popular hedge fund stocks in this group of stocks.
Our in-house analysis shows that we can use the sentiment information gathered from the hedge fund filings to classify in advance a select group of stocks that can beat the S&P 500 index by double digits annually on average. For instance, the portfolio of our monthly newsletter’s stock picks has beaten the market by over 88 percentage points since March 2017 (see the details here). Some of the portfolio holdings of our monthly newsletter have been shared online too. In October, we shared this real estate stock and since then, it’s been up nearly 50 percent.
Based on hedge fund sentiment data and XHB’s holdings, here are the 11 best housing/homebuilder stocks to buy now:
11. Floor & Decor Holdings, Inc. (NYSE:FND)
Number of Hedge Funds: 42
Total Value of HF Holdings: $942 million
We tell our subscribers two things: First, they should pay attention if Abdiel Capital buys a stock. Second, they should pay attention when an insider of the company buys a stock. Abdiel Capital had the largest position in FND with more than $370 million invested at the end of September. Back in May, an insider of FND bought 2240 shares at an average price of $44.53. Such an odd number of shares. The insider was probably trying to invest $100K into this stock because of its cheap valuation. Today, FND shares trade for $99.
Here is what Wasatch Core Growth Fund said about FND in its Q3 investor letter:
“Falling mortgage interest rates have led to tailwinds in some industries. For example, there’s been a spike in U.S. home sales and new-home construction. These trends have been benefiting several of our holdings, including Floor & Decor Holdings, Inc. (FND). The company sells tile, wood, laminate and natural-stone flooring—as well as related decorations and accessories. We think the number of stores may increase by about 20% in 2021 and upcoming same-store sales growth could exceed analysts’ expectations. Floor & Decor was among the top contributors to Fund performance for the quarter.”
10. NVR, Inc. (NVR)
Number of Hedge Funds: 42
Total Value of HF Holdings: $1.14 billion
NVR ranks 10th in our list of the best homebuilder stocks to buy now. There were also 42 hedge funds with bullish NVR positions, but they invested $200 million more into NVR than FND.
Ensemble Capital talked about NVR in its 2020 Q3 investor letter:
“NVR: A home builder that deploys an idiosyncratic strategy that avoids speculating on land prices and builds homes to order rather than putting up a development and then hoping they can sell all the houses, NVR is an extremely well-run company with a focus on building new homes in the Southeastern United States. We believe that the home building industry, scarred from the overbuilding mistakes they made during the housing bubble 15 years ago, have been very slow to build new homes in recent years. This low level of investment has now gone on too long and there is a shortage of homes available to buy in the US. With mortgage interest rates plummeting, and people being triggered to reconsider their housing situation due to the pandemic, orders for new homes have gone vertical causing NVR’s stock to rally 25% during the quarter.”
9. Owens Corning (OC)
Number of Hedge Funds: 43
Total Value of HF Holdings: $683 million
OC ranks 9th in our list of the best housing stocks to buy now. Antipodes Partners was bearish on OC earlier in 2020. Here is what they said:
“Rotating exposure in Consumer Cyclicals – Developed Markets via exiting the position in Owens Corning, more closely linked to US housing activity which may suffer in virus lockdown and economic downturn, and building the position in Lowe’s, where home improvement and repair/maintenance is expected be more resilient.”
OC shares were trading below $29 during the March market crash, but managed to recoup all of their losses by the summer and currently trade at $79. LOW also followed a very similar trajectory in 2020, falling as low as $60, but currently trading above $160. We don’t think there is a significant difference between the returns of both stocks. They both have been good to investors.
8. PulteGroup, Inc. (PHM)
Number of Hedge Funds: 43
Total Value of HF Holdings: $1017 million
Mark Tepper may not like PHM but the stock ranks 8th in our list of the best homebuilder stocks to buy now because there are a total of 43 hedge funds that disagree with him. Quant hedge fund AQR’s models must think the stock is deeply undervalued as AQR has more than $200 million invested in the stock. A company insider also spent more than $200,000 on 5000 PHM shares recently.
7. Masco Corporation (MAS)
Number of Hedge Funds: 46
Total Value of HF Holdings: $879 million
Masco ranks 7th in our list of the best housing stocks to buy now. The number of bullish hedge fund positions has been increasing since March when there were 34 hedge funds with bullish positions. A couple of weeks ago Masco announced that it will “acquire the assets of Kraus, an online plumbing fixture company focused on delivering modern, high-quality sinks, faucets, and related products”.
6. Tempur Sealy International, Inc. (TPX)
Number of Hedge Funds: 46
Total Value of HF Holdings: $1.13 billion
There is a lot of competition in the mattress space, but it looks like TPX and Sleep Number (SNBR) are turning out to be winners at the expense of Casper (CSPR). TPX shares returned around 30% since the beginning of 2020 and we think this is a very respectable performance. Rehan Jaffer’s hedge fund had the largest position in TPX at the end of September with a nearly 3 million share position.
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