5 Stocks to Buy as Housing Recovery Strengthens

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The freshly released GDP report suggests that the U.S. economy is going from strength to strength. Two sectors have been powering the economic turnaround, consumer spending and housing activity. Most of the data related to homebuilding released this month suggest that housing activity is improving.

This is borne out by the fact that both the SPDR S&P Homebuilders ETF (XHB) and the Real Estate SPDR (XLRE) have gained at least 7% over last month. Second only to the rebound in the energy sector, this spurt of growth makes it imperative that you add stocks from this sector to your portfolio.

Most Indicators Improve

The majority of this month’s housing related indicators indicated that the pace of growth has quickened. Construction spending increased 1.5% from December to its highest level since 2007 in January. Housing starts increased 5.2% from January to a five-month high in February. This increase was primarily due to the fact that construction of single-family houses touched a nine-year high.

Meanwhile, new home sales rose by 2% in February, in line with the consensus estimate. Pending home sales increased 3.5% from January to a seven-month high of 109.1 in February. This gain follows a 3.1% loss in January. Moreover, residential investment jumped 10.1% in the fourth quarter, compared with a rise of 8.2% in the third. It also surged 8.9% in 2015, exceeding 2014’s gain of only 1.8%.

Some Concerns Remain

However, a few of the reports highlighted causes for concern. Existing home sales tumbled in February after reaching a six-month high in January and also came in below the consensus estimate. Meanwhile, the National Association of Home Builders (NAHB)/Wells Fargo housing market index (HMI) remained flat at 58 in March.

At first glance, this seems to be a fair outcome for the sector. However, it does indicate the relatively slow pace of recovery. This is primarily attributable to labor shortages and the increase in costs of land and labor. At the same time, the index has remained well above the 50 mark for several months indicating a steady recovery.

Our Choices

The steady pace of growth in the housing sector means that it is an increasingly attractive investment option. Despite a few weaknesses, its pace of growth is fairly constant and is most likely to increase. However, it is important to pick winning stocks from this sector.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.

Gibraltar Industries, Inc. (ROCK – Analyst Report) manufactures and distributes products to the industrial and buildings market. The products range from ventilation and expanded metal to mail storage solutions and rain dispersion products and solutions.

Gibraltar Industries has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. The company has expected earnings growth of 21.7% for the current year. Its earnings estimate for the current year has improved by 0.8% over the last 30 days.

Hovnanian Enterprises Inc. (HOV – Snapshot Report) is one of the largest homebuilding companies in the U.S.

Hovnanian Enterprises has a Zacks Rank #2 (Buy) and a VGM Score of B. The company has expected earnings growth of more than 100% for the current year.  The forward price-to-earnings (P/E) ratio for the current financial year (F1) is 5.96, lower than the industry average of 10.77.

KB Home (KBH – Analyst Report) is a well-known homebuilder in the United States and one of the largest in the state of California.

KB Home has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth of 49.5% for the current year. Its earnings estimate for the current year has improved by 1.5% over the last 30 days.

Universal Forest Products Inc. (UFPI – Analyst Report) engineers, manufactures, treats, distributes and installs lumber, composite wood, plastic and other building products.

Universal Forest Products has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth of 14% for the current year. It has a P/E (F1) of 18.16, lower than the industry average of 27.43.

Watsco Inc. (WSO – Analyst Report) is the largest distributor of heating, ventilation and air conditioning equipment as well as related parts and supplies (HVAC/R) in the U.S.

Watsco has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 12.3% for the current year.

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