Housing: 3 Stocks to Buy, 1 to Avoid

Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The rebound in the US economy is believed to be due to increased consumer spending. With surplus income in the market, money trickled down to the real estate sector leading to recovery. According to a recent report, sales of preoccupied homes have risen significantly, which has increased the median price of preoccupied homes by 11% YoY. Also the availability of “homes for sale” is at its 10 year low, which has renewed public interest in new construction, bringing US Housing Starts to its 4 year high.

It’s always advisable to ascertain an investment strategy before aiming for the skies. So in my opinion, picking up construction companies with sound fundamentals and good stock performance would be a great strategy.

Beazer Homes (NYSE: BZH) is a Georgia based Fortune 500 residential construction company. Despite the booming new construction in the US, Beazer Homes is struggling with its bottom-line. Quarterly revenues rose by 11%, but the company reported a loss of $66.2 million, worsening from the last year’s quarterly loss of $43.2 million. The worsening profitability was due to the onetime debt extinguishment charge of $24.2 million. Overall, Beazer Homes has been struggling with federal probes into the company’s fraudulent accounting and mischievous lending practices. Though the company reported an improvement in gross margins, investors should stay away from this loss making organization that has no plans for recovery.

Ryland Group (NYSE: RYL), which besides being involved in home construction, also provides mortgage financing companies. With mortgage financing on the rise due to lower interest rates and consumer confidence at its 5 year high, Ryland Group reported  quarterly earnings of $0.46 against the estimated $0.21. Revenues jumped 44.3% and the stellar financial was due to the 56% jump in new orders. In my opinion, Ryland Group gives the investors to capitalize on both rising mortgage financing and booming home constructions.

Hovanian Enterprises (NYSE: HOV), which is also involved in home construction and mortgage financing, reported a 63.4% earnings surprise. Net sales rose by 35.5%, but reported a net adjusted loss of $0.05 against the street’s estimated loss of $0.14. The company has a market capitalization of $624 million, and ended the quarter with $252 million. Recently it was announced that Hovnanian Enterprise had completed the issuance of $797 million of secured notes and $100 million of exchangeable notes, which would be due by 2016. With a massive amount of cash (compared to its market cap), if management chooses to leverage its holdings in a booming market, investors could be looking a staggering returns.

D.R Horton (NYSE: DHI) also delivered better than expected results, with earnings surging to $100.1 million, up from $25.7 million in last year’s quarter. Revenues jumped stood at $1.3 billion, up 21, and the backlog of homes under contract rose by 49%. Management announced that it has around 13k homes in its inventory along with 60k finished lots, enabling the company to meet rising demand. With a strong backlog, huge inventory, and orders rising by 24%, D.R Horton makes a very good investment choice.

<img src="http://media.ycharts.com/charts/83e28f2842dbdf267b76c0d7f1fbef8a.png" />

BZH data by YCharts

In my opinion, all companies except for Beazer Homes have growth potential. I also believe that, housing starts and mortgage financing should witness an uptick in the near term future, as the liquidity further trickles down into the economy in a low interest rate environment. Creating a portfolio of the three picks would be advisable to spread the risk.

PiyushArora has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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