The SPDR S&P Homebuilders ETF has been on a tear, with gains north of 18% over the past 12 months, enough to eke out a win against the broader S&P 500 index. If investors really want to look for outsize gains in the housing industry, however, here are three top stocks that should do the trick: LGI Homes Inc (LGIH +0.54%), NVR, Inc. (NVR +0.43%), and Home Depot Inc (HD 0.03%). Not only have all three beaten the performance of the S&P Homebuilders ETF over the past year, but I expect them to continue to do so in the years ahead. Let's take a closer look at these stocks and see what makes them so attractive.
Not only have all three beaten the performance of the S&P Homebuilders ETF over the past year, but I expect them to continue to do so in the years ahead. Let's take a closer look at these stocks and see what makes them so attractive.
A small homebuilder with big potential
LGI Homes is a homebuilder with a market cap of just over $1 billion. Its small size, though, underscores the huge opportunity it has to grow into something much bigger. And growing it is! When the company reported its second-quarter earnings in August, home sales revenue had increased 45.6% year over year to $324.2 million, and net income grew to $32.2 million, a 55.9% increase year over year. These incredible numbers were fueled by higher home closings, up 34%, and a higher average sales price, up 8.7% -- a heady combination for investors.
Nor is there any sign sales are slowing down for LGI Homes. When the company reported its August home closings, it reported it had closed on 596 homes during the month, a 55.6% increase year over year.
LGI Homes specializes in selling homes to people who previously rented and has a special program for buyers who don't have enough money for a traditional down payment. At the end of August, the company had 76 active selling home communities, a number that seemingly grows every week. In September alone, the company opened its first new community in the Minneapolis area, two new communities in Texas, two new communities near Seattle, and one new community in New Mexico. The best part is that all this growth can be had for a cheap valuation, as LGI Homes sports a P/E ratio of just 14.3 times.
The home building sector has performed particularly well this year. Image source: Getty Images.
A luxury home builder built to beat the housing cycle
NVR runs three distinct homebuilding brands, giving it access to the full range of buyers in the real estate market:
- Ryan Homes: Since NVR acquired Ryan Homes in 1987, this division has focused on first-time homebuyers and offers single-family homes, townhouses, and condominiums.
- NVHomes: Focuses on building luxury homes in Delaware, Maryland, North Carolina, Pennsylvania, and Virginia.
- Heartland Homes: Builds upscale homes in western Pennsylvania, primarily around Pittsburgh.
In its most recently reported quarter, NVR's revenue increased 11% to $1.5 billion and gross profit margin increased 220 basis points to 19.5%, helped by both lower construction costs and higher home prices. While its its revenue growth is solid, it is NVR's self-described "conservative lot acquisition strategy" that gives it an edge in a notoriously cyclical market. Instead of developing land, NVR purchases finished lots from third parties for a deposit that can range as high as 10%. If NVR decides to later walk away from the lots, it loses the deposit.
While this business model actually hinders the company during a housing bull market, it acts as a form of protection come the next market downturn. With this strategy, NVR has a huge advantage when it negotiates with third-party lot sellers because it can ultimately just walk away from the purchase. Given NVR's double-digit revenue growth and a plan for when the housing market inevitably stumbles, investors have a stock they can write home about with this home builder.
Hit a home run with this home improvement retailer
While it's not a home builder, there's no denying Home Depot's connection to the housing industry. Investors have experienced market-crushing returns with this stock: Over the past five years, Home Depot has doubled the S&P 500's gains. Go back ten years, and that gap only widens.
The stock price has merely followed the business's phenomenal success, and this past quarter was no exception. Home Depot delivered more solid results, even in the midst of a brutal environment for most retailers. For the quarter, the giant retailer reported sales of $28.1 billion, a 6.2% increase year over year. Diluted earnings per share rose 14.2% to $2.25.
Home Depot has had to do a number of things to stay ahead of rivals and fend off a growing e-commerce trend. For starters, it has worked on beefing up its own website's sales. In the second quarter, its online sales increased by 23% and now represent 6.4% of all sales. More than that, it has beautifully blended its online and in-store customer experiences into one holistic shopping experience. Furthermore, 43% of all online orders are now picked up in a store.
Other smart moves include selling exclusive, innovative products, improving the efficiency of its supply chain, and doing an excellent job catering to Professional contractors. Finding ways to smartly allocate capital, like its $1.6 billion acquisition of Interline Brands two years ago, has also helped the retail chain flourish. Home Depot has a history of market-beating returns and there seems to be little reason for that to stop anytime soon.
