Despite mortgage rates that are at 8% in some areas of the country, the housing market remains relatively strong. While some investors will dismiss investing in the sector as reckless speculation, Warren Buffett is buying the sector. That’s not the only reason there may be a bullish setup for the best homebuilder stocks.
Earlier this summer Deutsche Bank described the housing market in the United States as underbuilt. One reason for this is the “great relocation” that continues to change the housing landscape. Single- and multi-family homes can’t get built fast enough in many of the hottest areas of the country.
Another reason is that the higher interest rates are keeping many existing homeowners in place. That puts homebuilders in a great position to fill the gap. If interest rates stay higher for longer, it will create a backlog that won’t be filled anytime soon.
The best news is that many of the best homebuilder stocks are undervalued. I many cases, these stocks create shareholder equity through reliable dividends and share repurchases.
D.R. Horton (DHI)
D.R. Horton (NYSE:DHI) is one of the three stocks that Buffett’s hedge fund, Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) bought this summer. Of those three, DHI stock may be the most undervalued. The stock currently trades at a forward P/E ratio of 8.6 times. It also is coming off an earnings report where it beat on the top and bottom lines. Revenue was also higher year-over-year.
One feature that makes D.R. Horton one of the best homebuilder stocks is the company’s ability to turn homes quickly. This matters because homebuilders usually rely on borrowed money to finance their builds. Having the ability to turn homes quickly can keep their debt level manageable in a higher-for-longer interest rate environment.
Analysts project D.R. Horton’s earnings to grow earnings by more than 5% in the next 12 months. That corresponds with analysts giving the stock a consensus price target of $145.35 that is 25.6% higher than the price as of September 5, 2023.
Lennar (LEN)
Lennar (NYSE:LEN) Is another of the homebuilder stocks purchased by Berkshire Hathaway. One of Lennar’s key markets is Florida, which is still one of the fastest growing sectors of the homebuilding sector.
LEN stock is down from its all-time high which it reached in mid-July. That was after the company posted a double beat in its second quarter earnings report. Many analysts raised their price targets since that report. However, that may not be reflected in the company’s stock price which is down 7.6% in the last month. Not surprisingly, short interest is up more than 10% in that time.
However, Lennar stock is still an attractive buy that is trading at 9.5x forward earnings. It also pays a dividend with an attractive 1.3% yield and a track record of at least five consecutive years of dividend growth which puts it among the best among Standards and Practices (S&P) 500 stocks.
PulteGroup (PHM)
PulteGroup (NYSE:PHM) was not one of the homebuilder stocks bought by Warren Buffett. However, it still makes this list of the best homebuilder stocks. The company is the third largest builder with a network that covers many of the hottest sectors in the country including Florida and Texas.
Also, approximately 50% of the company’s homes built in 2022 closed at a price point below $500,000. At a time when the price of an average home continues to move higher, Pulte continues to build homes that are in the sweet spot for many prospective buyers.
Of the three stocks on this list, PulteGroup has the smallest forecasted earnings growth at just 0.8%. However, that isn’t keeping analysts away. The stock has an average price target of $98.38 which is 26% above the current price. A total of 14 out of 17 analysts give PHM stock a “Buy” or “Strong Buy” rating.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.