3 Homebuilding Stocks for Spring Construction Boom - Analyst Blog

3 Homebuilding Stocks for Spring Construction Boom

The housing start numbers came in below the street's expectations this morning, though the shortfall was a bit less pronounced that was the case last month.  Like most recent economic data, the Polar Vortexes caused a slump in the overall numbers for January and early February.  While new construction dipped from 909,000 in January to 907,000 in February, there was a silver lining in the housing report.

New building permits rose 7.7%, their highest rate since October, and more importantly, to the second highest rate since the middle of 2009.  The main catalysts behind the increase in new building permits were condominiums and rental apartment buildings.

The permits gain is reassuring, given recent signs that the housing recovery might be losing steam.  Monday's homebuilder sediment index came in below the 50 level, the dividing line between expanding and contracting activity levels.  The weather has no doubt been a major headwind for the sector, though builders seem to be facing other issues as well, like shortage of building lots, skilled labor, and low inventory of new homes for sale.  The strong permits number shows that we can expect steady gains in construction activities over the spring and summer months. 

Companies To Consider

Universal Forest Products Inc. UFPI is currently a Zacks Rank #1 (Strong Buy), and has produced an average Positive Earnings Surprise of 661.69% over the past four quarters.  UFPI supplies wood and wood alternative products for retail home building centers and other retailers.  Universal Forest Products also offers structural lumber and other products for the manufactured housing industry. 

Over the past thirty days, UFPI's earnings estimates have risen from $0.41 to $0.47 for Q1 2014.  Moreover, earnings estimates for the fiscal year 2014 have increased from $3.12 to $3.30; which would translate to a 55.66% year over year growth rate. 

The Price & Consensus chart below adequately captures the company's strong momentum.

Potlatch Corp PCH is a Real Estate Investment Trust with two major segments; the Resource Management division, which owns and manages timberlands, and the Wood Products division, which manufactures the lumber and then sells it to wholesalers for the primary purpose of home building and construction activities. 

Currently, Potlatch carries a Zacks Rank #2 (Buy), and has seen their earnings estimates rise over the past sixty days.  Q1 2014 earnings estimates have risen from $0.41 to $0.46, and Fiscal Year 2014 earnings estimates have also increased from $1.86 to $1.91.  Moreover, Potlatch has produced an average positive earnings surprise of 24.10% over the past four quarters. 

Lennar Corp LEN specializes in homebuilding activities throughout the entire USA.  Primarily, LEN develops multifamily rental properties, single family homes, and detached homes.  Lennar Corp currently carries a Zacks Rank #2 (Buy), and has produced four consecutive Positive Earnings Surprises with an average Positive Surprise of 40.44%.  Furthermore, over the past sixty days, Fiscal Year earnings estimates have risen from $2.42 to $2.49. 

Bottom Line

This year's winter impacted many companies throughout all sectors, and the threat of more inclement weather is not yet behind us.  This nasty weather has caused many companies to lower guidance, and overall, we have seen many estimates fall for Q1 2014.  But with housing permits increasing over 7%, and spring quickly approaching, the outlook for homebuilders looks promising, with room to grow beyond the spring building fury. 

So if you are inclined to invest in the homebuilding segment, you should strongly consider Universal Forest Products, Potlatch Corp, and Lennar Corp. 

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