The rise of interest rates brought an increase in mortgage rates, progressively weakening the US housing sector. Google trends showed that consumers are worried about a real estate market crash in the last couple of days, with housing demand weakening.
Meanwhile, KeyBanc analyst Ken Zenner joined CNBC’s Squawk on the Street on September 28 to discuss homebuilder stocks and their outperformance over the S&P 500.
“We think this is the time to invest. Our recent thesis focuses on the builder’s relative outperformance to the S&P over nineteen cycles since 1963. So we’re not sure that it’s the bottom, but a lot of our clients invest relative to the S&P. We think that the relative risk to return is very compelling.”
He also added:
“A lot of times as rate concerns unfold, what you see in the worst cycles, the homebuilders actually through earlier to the S&P versus softer markets.”
What stocks to buy?
Among the stocks Zener is looking to buy in this cycle, the first one mentioned is NVR Inc. (NYSE: NVR), citing high cash flows and return on inventory, claiming that it has a negative 15% net leverage.
Additionally, two other stocks the analyst mentioned as his homebuilder’s picks are Lennar (NYSE: LEN) and D.R. Horton (NYSE: DHI); he noted the two firms should profit in an asset-lighter model that homebuilders will be moving towards, according to Zener.
Higher end resilience
Furthermore, the thesis of homebuilders targeting higher-end consumers to be more resilient due to their purchasing power was debunked by the analyst who cited return on inventory as the most critical metric.
“We cover stocks, so adjectives like demographics, tight supply, we really focus on return on inventory, which is 90% correlated to builder’s book value.”
It seems that there are gains to be made among the homebuilder stocks despite a softening in the real estate market. However, the onus should be on quality inventory and high cash flow to ensure positive returns in the long run.
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