Market Overview

4 Homebuilders With The Most Upside Potential

4 Homebuilders With The Most Upside Potential
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Many homebuilder stocks have had a strong start to the new year, even as some economic data suggest the housing recovery may have stalled.

But analysts believe that MDC Holdings (NYSE: MDC), Meritage Homes (NYSE: MTH), M/I Homes (NYSE: MHO) and Standard Pacific (NYSE: SPF) shares still have some headroom.

It is not unusual for stocks on a tear to the overrun their mean price targets, which is a signal of how far analysts on average expect the share price to climb. Some of the largest homebuilders, such as Lennar and Toll Brothers, have done just that and are trading near their 52-week highs. Others are at or near the mean price targets.

See also: KeyBanc Offers Pair Trade: Upgrades Pulte, Downgrades Lennar

MDC Holdings

This Denver-based homebuilder saw strong growth in home sales revenue in both the fourth quarter and all of 2013. The company sports a market capitalization near $1.5 billion, with a dividend yield of about 3.2 percent. Its long-term earnings per share (EPS) growth forecast is more than 25 percent.

For at least three months, the consensus recommendation of the analysts surveyed by Thomson/First Call is to hold shares. But the mean price target, or where analysts expect the share price to go, is more than eight percent higher than the current share price. The consensus target is less than the 52-week high, though.

Shares are down more than four percent year to date after retreating the past couple of days to below the 200-day moving average. Over the past six months, the stock has underperformed not only competitors D.R. Horton, KB Home and PulteGroup, but the S&P 500 as well.

Meritage Homes

This builder of single-family homes also saw strong revenue growth in the fourth quarter, and EPS exceeded estimates. Its market cap is less than $2 billion, but it does not offer a dividend. The long-term EPS growth forecast is more than 23 percent, and the return on equity is about 16 percent.

Just seven of the 16 analysts surveyed recommend buying shares, though only one rates the stock at Underperform. They see a little room for shares to run, as their mean price target is more than four percent higher than the current share price. Shares last traded in that neighborhood back in May.

Here too the share price pulled back in the past couple of days and is only up marginally year to date. It is still above the 50-day and 200-day moving averages. The stock has underperformed competitors D.R. Horton, KB Home and Lennar over the past six months. However, it has outperformed the broader markets.

M/I Homes

Fourth-quarter EPS almost doubled year-over-year and revenues were better than analysts expected. The Columbus, Ohio-based company has a market cap of around $600 million. The return on equity is a healthy 38 percent and the long-term EPS growth forecast is about 15 percent.

Only three analysts were surveyed, but they all recommend buying shares. They see plenty of room for shares to run, as their mean price target is about 19 percent higher than the current share price. And note that the consensus target would be a new multiyear high.

The share price is now less than four percent lower than at the beginning of the year, and it recently dropped below the 50-day moving average. But over the past six months, the stock outperformed both the S&P 500 and the other homebuilders featured here.

See also: Warren Buffett: America's Best Days Lie Ahead

Standard Pacific

This homebuilder also saw strong growth in home sales revenue in both the fourth quarter and for all of 2013. It has a market cap near $2.5 billion, but it does not offer a dividend. The return on equity is more than 29 percent, but the operating margin is less than the industry average.

Half the 14 analysts polled recommend buying the shares, and the other half rate the stock at Hold. A move to the analysts' mean price target would represent a more than six percent gain for shareholders. But note that shares were trading higher than that last May.

Here, the share price has risen more than six percent in the past week but is now about the same as at the beginning of the year. It is north of the 50-day and 200-day moving averages. The stock has outperformed the broader markets over the past six months, but it has underperformed Lennar and PulteGroup.

At the time of this writing, the author had no position in the mentioned equities.

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Posted-In: D.R. Horton KB Home lennar M/I Homes mdc holdings meritage homes PulteGroupTrading Ideas Best of Benzinga

 

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