Certain homebuilder stocks have done really well since the housing crisis, while some have missed out on the rally.
Just look at the SPDR S&P Homebuilders ETF (NYSEArca: XHB), which is up a mere 1% since the start of 2007. Meanwhile, the S&P 500 is up 47%.
Digging into the homebuilding space, you’ll find that enormous players like Lennar (NYSE: LEN) and D.R. Horton (NYSE: DHI) are up 272% and 183%, respectively, over the last five years.
However, other smaller homebuilder stocks, including Taylor Morrison Home Corp. (NYSE: TMHC) and MDC Holdings (NYSE: MDC), whose shares are either negative or barely positive for the last five years.
This just reaffirms my thesis that selectivity is more important than ever. Specifically, driving the recent rebound in homebuilding is first-time homebuyers. In May, existing home sales were up 5.1% year-over-year, with first-time homebuyers making up 32% of those sales, compared to 27% a year ago.
Sluggish growth in employment for the millennials and an adjustment period to student loan debt (where new grads had to get acclimated to relativley high student debt levels) kept the first-time homebuyer at bay over the last couple years. However, they’re now coming back around.
According to the Federal Housing Administration, first-time homeowner approvals have been moving higher in recent months. And as Lennar recently noted, “We are starting to see the first-time homebuyer come back to the marketplace.”
With all that in mind, let’s have a look at the top two homebuilder stocks that have exposure to first-time homebuyers:
Ryland Group (NYSE: RYL) is a builder of single-family homes, townhomes and condominiums, with a focus on entry-level and first-time homebuyers. It also does some marketing to second-time buyers.
The big news for Ryland of late is its planned merger with Standard Pacific (NYSE: SPF). The deal is a win-win for both players, adding diversification and market share gains. Ryland gains exposure to the fast-growing California market, which also has higher price points.
The move also gives the companies a bigger presence in the top metropolitan statistical areas (MSAs). With the merger, the combined company will be in the top five in terms of market share for 15 of the top 25 MSAs in the U.S.
Taylor Morrison Home
Granted, I did just mention that Taylor Morrison has been one of the worst-performing homebuilder stocks over the last half decade. It was down 15% while others soared, but that doesn’t mean things can’t change.
This stock is the cheapest in terms of price-earnings ratio among the top 10 homebuilders by market cap, trading at a P/E ratio of just 11. Meanwhile, it’s one of only two in that top 10 that is generating a double-digit return on invested capital, coming in at 10.2%.
Effectively, Taylor has traded exposure to the bubble-like Canadian housing market to gain more exposure to the first-time homebuyers. It sold off Monarch, its Canadian homebuilding operations, and bought JEH Homes, which has most of its exposure to first-time buyers. The move helps diversify Taylor’s business, which has historically been focused on the move-up market.
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