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Homebuilder stocks are hitting new highs as anticipation builds ahead of the Federal Reserve’s upcoming rate cut decision. Both Lennar Corp and PulteGroup, Inc. surged to 52-week highs on Sept. 18, with Lennar reaching $190.12 and PulteGroup hitting $141.43.
The rally comes as investors bet that the Fed’s expected rate cut could further boost the already resurgent housing market.
Lower Rates To Benefit Home Builder Stocks
A note from Bank of America Securities highlights that the rally in homebuilder stocks has been underway since early July, coinciding with a drop in 30-year mortgage rates from 7% to 6.2%.
“Lower rates would benefit home demand,” the note added, suggesting that a Federal Reserve cut of 25 to 50 basis points would add fuel to the fire for the housing sector.
Read Also: Homebuilder Stocks Outperform Ahead Of Potential Rate Cuts — But What’s Next?
Lennar’s Cash Flow Yield In Focus As It Reports Q3 Earnings
Lennar, up 26.78% year to date and nearly 60% over the past year, has been a standout performer, benefiting from strong demand and improved earnings multiples. The company is expected to release its third-quarter earnings tomorrow (Thursday), which could provide further insights into its performance.
Bryn Talkington of Requisite Capital Management also pointed to Lennar's impressive free cash flow yield of 11%, making it an attractive play for investors seeking value amid the rate cut frenzy.
PulteGroup’s Margins Continue To Impress Investors
PulteGroup, up a whopping 82.46% over the past year, followed a similar path. The company, which develops single-family homes under well-known brands such as Pulte Homes and Centex, continues to enjoy top-of-the-line margins despite industry headwinds like inflation and a soft labor market.
Analysts believe the Fed's expected rate cut will temporarily relieve the housing affordability crisis, though long-term challenges remain.
Lennar and PulteGroup are positioned to keep riding the wave as the Fed’s decision looms. Investors eyeing exposure to the housing sector may want to watch closely.
Read Next:
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
New construction on single-family homes in the U.S. jumped in August as mortgage rates trend downward and the Federal Reserve is expected to cut rates on Wednesday for the first time in four years.
Single-family housing starts last month came in at an annualized rate of 992,000 units, up 15.8% from a revised figure of 857,000 for July, according to Commerce Department data released on Wednesday.
Starts for all privately-owned housing in August totaled an annualized rate of 1.356 million units, up 9.6% from the July revised estimate of 1.237 million and up 3.9% from the August 2023 rate of 1.305 million.
Single-family housing completions reached an annualized rate of 1.029 million in August, registering a 5.6% decline from July’s revised rate of 1.09 million.
Completions for all privately-owned homes in August were at a seasonally adjusted annual rate of 1.788 million, up 9.2% from the July revised estimate of 1.637 million and 30.2% above the July 2023 rate of 1.373 million.
Read Also: Housing Starts Rebound, Lift Homebuilder Stocks: Sign Of Economic Resilience
Building permits also rose last month, Commerce Department data showed.
Single-family authorizations in August were at a rate of 967,000, up 2.8% from the revised July figure of 941,000.
Privately-owned housing units authorized by building permits in August were at a seasonally adjusted annual rate of 1,475,000. That’s up 4.9% from the July revised rate of 1.406 million but below the August 2023 rate of 1.578 million.
The average rate for 30-year mortgages fell 14 basis points in the week ended Sept. 13 to 6.15%, marking the lowest rate since September 2022, according to the Mortgage Bankers Association.
The Federal Reserve is expected to lower its key interest rate ranging from 5% to 5.25% on Wednesday by either 25 or 50 basis points, signifying its first rate decline in four years.
Price Action: Homebuilders slid into Wednesday’s mid-day trading.
Exchange-traded funds that hold homebuilder stocks showed gains and losses.
Read Now:
Image: Shutterstock
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
PulteGroup (PHM) has been one of the most searched-for stocks on Zacks.com lately. So, you might want to look at some of the facts that could shape the stock's performance in the near term.
Over the past month, shares of this homebuilder have returned +12.6%, compared to the Zacks S&P 500 composite's +1.6% change. During this period, the Zacks Building Products - Home Builders industry, which PulteGroup falls in, has gained 11%. The key question now is: What could be the stock's future direction?
Although media reports or rumors about a significant change in a company's business prospects usually cause its stock to trend and lead to an immediate price change, there are always certain fundamental factors that ultimately drive the buy-and-hold decision.
Earnings Estimate Revisions
Rather than focusing on anything else, we at Zacks prioritize evaluating the change in a company's earnings projection. This is because we believe the fair value for its stock is determined by the present value of its future stream of earnings.
Our analysis is essentially based on how sell-side analysts covering the stock are revising their earnings estimates to take the latest business trends into account. When earnings estimates for a company go up, the fair value for its stock goes up as well. And when a stock's fair value is higher than its current market price, investors tend to buy the stock, resulting in its price moving upward. Because of this, empirical studies indicate a strong correlation between trends in earnings estimate revisions and short-term stock price movements.
For the current quarter, PulteGroup is expected to post earnings of $3.10 per share, indicating a change of +6.9% from the year-ago quarter. The Zacks Consensus Estimate remained unchanged over the last 30 days.
The consensus earnings estimate of $13.36 for the current fiscal year indicates a year-over-year change of +14%. This estimate has remained unchanged over the last 30 days.
For the next fiscal year, the consensus earnings estimate of $13.58 indicates a change of +1.7% from what PulteGroup is expected to report a year ago. Over the past month, the estimate has remained unchanged.
Having a strong externally audited track record, our proprietary stock rating tool, the Zacks Rank, offers a more conclusive picture of a stock's price direction in the near term, since it effectively harnesses the power of earnings estimate revisions. Due to the size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, PulteGroup is rated Zacks Rank #2 (Buy).
The chart below shows the evolution of the company's forward 12-month consensus EPS estimate:
12 Month EPS
Projected Revenue Growth
Even though a company's earnings growth is arguably the best indicator of its financial health, nothing much happens if it cannot raise its revenues. It's almost impossible for a company to grow its earnings without growing its revenue for long periods. Therefore, knowing a company's potential revenue growth is crucial.
In the case of PulteGroup, the consensus sales estimate of $4.26 billion for the current quarter points to a year-over-year change of +6.4%. The $17.43 billion and $18.35 billion estimates for the current and next fiscal years indicate changes of +8.5% and +5.3%, respectively.
Last Reported Results and Surprise History
PulteGroup reported revenues of $4.6 billion in the last reported quarter, representing a year-over-year change of +9.8%. EPS of $3.58 for the same period compares with $3 a year ago.
Compared to the Zacks Consensus Estimate of $4.48 billion, the reported revenues represent a surprise of +2.72%. The EPS surprise was +11.53%.
The company beat consensus EPS estimates in each of the trailing four quarters. The company topped consensus revenue estimates two times over this period.
Valuation
No investment decision can be efficient without considering a stock's valuation. Whether a stock's current price rightly reflects the intrinsic value of the underlying business and the company's growth prospects is an essential determinant of its future price performance.
While comparing the current values of a company's valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S) and price-to-cash flow (P/CF), with its own historical values helps determine whether its stock is fairly valued, overvalued, or undervalued, comparing the company relative to its peers on these parameters gives a good sense of the reasonability of the stock's price.
As part of the Zacks Style Scores system, the Zacks Value Style Score (which evaluates both traditional and unconventional valuation metrics) organizes stocks into five groups ranging from A to F (A is better than B; B is better than C; and so on), making it helpful in identifying whether a stock is overvalued, rightly valued, or temporarily undervalued.
PulteGroup is graded A on this front, indicating that it is trading at a discount to its peers. Click here to see the values of some of the valuation metrics that have driven this grade.
Conclusion
The facts discussed here and much other information on Zacks.com might help determine whether or not it's worthwhile paying attention to the market buzz about PulteGroup. However, its Zacks Rank #2 does suggest that it may outperform the broader market in the near term.
Zacks Investment Research
Homebuilder and building product stocks could see an upward trend if the Federal Reserve cuts the key interest rate on Wednesday, based on historical performance, according to a major U.S. bank.
The Fed is expected to lower rates by either 25 or 50 basis points, marking the first change since July 2023 when it raised the rate to a range of 5% to 5.25%.
“Builders and building product stocks have outperformed in anticipation of rate cuts,” BofA Securities said in a note on Tuesday.
“Lower rates would benefit home demand.”
Homebuilder and building product stocks have rallied since early July as 30-year mortgage rates have fallen from 7% to roughly 6.2%, boosting new home demand and spending on home improvements, BofA said.
“In our view, the stock performance has been stronger than the improvement in underlying fundamentals as investors look through near-term weakness to a 2025 recovery fueled by lower mortgage rates and pent-up demand,” the note stated.
Read Also: Homebuilder Stocks Rally To Record Highs On Rate-Cut Frenzy But Housing Sales Still Struggle
“Housing sector outperformance ahead of rate cuts is consistent with prior cycles, but the magnitude and valuations are higher this time around. Stock performance following the first cut is more mixed although usually positive for homebuilders.”
BofA noted that homebuilders outperformed the S&P 500 in the three months before three of the last five initial rate cuts, and building products outperformed in four of the last five.
In the last three months, homebuilder stocks have gone up 26% and building product shares have risen 13%, compared to the S&P 500’s 2% uptick over the same period, BofA said.
“Assuming the Fed starts to cut rates in September, homebuilder and building product stocks will be trading at a higher valuation than going into any of the last five periods when the Fed started to cut.”
BofA also pointed out that homebuilders and building products typically underperform the S&P 500 ahead of a recession but outperform it during and after a recession.
Price Action: Homebuilder stocks traded higher on Tuesday.
Building products also saw gains and losses.
The S&P 500, which is tracked by SPDR S&P 500 ETF Trust , was up 0.02% to 5,634.58.
Read Now:
Image created using artificial intelligence via Midjourney.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
For Immediate Release
Chicago, IL – September 17, 2024 – Zacks Equity Research shares Sprouts Farmers Market SFM as the Bull of the Day and Tenaris TS as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Berkshire Hathaway Inc.’s (BRK.B), NVR, Inc. NVR and Lennar Corp. LEN.
Here is a synopsis of all five stocks:
Bull of the Day:
Sprouts Farmers Market, a Zacks Rank #1 (Strong Buy), provides natural and organic food products primarily in the United States. Shares of the healthy grocer are widely outperforming the market this year with the backing of a leading industry group. The stock is hitting a series of 52-week highs and displaying relative strength as buying pressure accumulates in this top-ranked stock.
SFM stock is part of the Zacks Foods – Natural Foods Products industry group, which currently ranks in the top 29% out of more than 250 Zacks Ranked Industries. Because it is ranked in the top half of all Zacks Ranked Industries, we expect this group to outperform the market over the next 3 to 6 months, just as it has consistently over the past year.
Historical research studies suggest that approximately half of a stock’s price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1.
It’s no secret that investing in stocks that are part of leading industry groups can give us a leg up relative to the market. By focusing on leading stocks within the top 50% of Zacks Ranked Industries, we can dramatically improve our stock-picking success.
Company Description
Sprouts Farmers Market boasts a unique grocery model, offering a variety of fresh produce, meats, seafood, dairy, vitamins, and other supplements. Founded in 1943, the Phoenix-based grocer operates more than 400 stores in 23 states.
The company’s focus on product innovation and expansion of private label offerings bodes well for the future. The organic foods provider has witnessed a remarkable surge in e-commerce sales this year, expanding its digital footprint through key partnerships with Uber Eats, DoorDash, and Instacart.
An aggressive expansion plan to open 35 new stores in 2024 underscores its confidence in long-term growth. Sprouts has invested heavily to improve operational efficiencies, highlighted by its Fresh Item Management Technology which deploys computer-assisted ordering methods.
Earnings Trends and Future Estimates
The top-ranked company has put together an impressive earnings history, surpassing earnings estimates in each of the past twenty consecutive quarters. Back in July, Sprouts reported second-quarter earnings of $0.94/share, a 22.1% surprise over the $0.77/share consensus estimate.
The grocer has delivered a trailing four-quarter average earnings surprise of nearly 12%. Consistently beating earnings estimates is a recipe for success and bolsters the bullish case.
SFM shares received a boost as analysts covering the company have been increasing their third-quarter earnings estimates lately. For the current quarter, earnings estimates have risen 8.7% in the past 60 days. The Q3 Zacks Consensus EPS Estimate now stands at $0.75/share, reflecting a potential growth rate of 15.4% relative to the year-ago period.
Let’s Get Technical
SFM stock has advanced more than 100% this year alone. This is the kind of stock we want to include in our portfolio – one that is trending well and receiving positive earnings estimate revisions.
Only stocks that are in extremely powerful uptrends are able to witness this type of price move. SFM shares broke out to a series of all-time highs back in August, even as the general market pulled back. Stocks that hold up well through periods of volatility tend to lead the next leg higher.
Notice how both the 50-day (blue line) and 200-day (red line) moving averages are sloping up. The stock has been widely outperforming the major indices, indicating a prolonged period of relative strength. With both strong fundamental and technical indicators, SFM stock is poised to continue its outperformance.
Empirical research shows a strong correlation between near-term stock movements and trends in earnings estimate revisions. As we know, Sprouts Farmers Market has recently witnessed positive revisions. As long as this trend remains intact (and SFM continues to deliver earnings beats), the stock will likely continue its bullish run into the end of this year and beyond.
Bottom Line
A promising combination of accelerating growth and momentum metrics bodes well for SFM shareholders, as the trend appears set to continue in the quarters ahead.
Backed by a top industry group and impressive history of earnings beats, it’s not difficult to see why this company is a compelling investment. Robust fundamentals combined with an appealing technical outlook certainly justify adding shares to the mix. The future looks bright for this highly-ranked, leading stock.
Bear of the Day:
Tenaris is a global manufacturer and supplier of steel pipe products and associated services to the oil and gas, energy, and related industries. The company produces and sells seamless and welded steel tubular products such as steel casings, which sustain the walls of oil and gas wells during and after drilling.
Based in Luxembourg, Tenaris also manufactures and distributes steel line pipes to transport crude oil and natural gas from wells to refineries, storage tanks and distribution centers. In addition, the company provides premium joints and couplings for use in high pressure or high temperature environments, as well as coiled tubing for oil drilling and subsea pipelines.
The Zacks Rundown
Tenaris, a Zacks Rank #5 (Strong Sell) stock, is a component of the Zacks Steel – Pipe and Tube industry group, which currently ranks in the bottom 26% out of approximately 250 Zacks Ranked Industries. As such, we expect this industry group as a whole to underperform the market over the next 3 to 6 months, just as it throughout the year.
Candidates in the bottom tiers of industries can often be intriguing short candidates. While individual stocks have the ability to outperform even when included in a lackluster industry, the inclusion in a weaker group serves as a headwind for any potential rallies and the journey forward is that much more difficult.
Along with many other steel-related stocks, TS shares have been struggling this year while the general market returned to new heights. The stock is hitting a series of lower lows and represents a compelling short opportunity as we head deeper into the latter half of the year.
Recent Earnings Misses & Deteriorating Outlook
Tenaris has fallen short of earnings estimates in four of the past eight quarters. Back in July, the company reported second-quarter earnings of $0.59/share, missing the $0.97/share Zacks Consensus estimate by -39.2%. Consistently falling short of earnings estimates is a recipe for underperformance, and TS is no exception.
CEO Paolo Rocca stated during the Q2 earnings call that despite high levels of oil and gas production in the United States, drilling activity has decreased, resulting in “reduced overall demand for pipes.” He also touched on the company’s outlook in other regions.
“The change in the government in Mexico and the uncertainties surrounding the policy for the energy sector are limiting drilling investment in the country. In Argentina, the necessary stabilization of the macroeconomic environment is delaying investment in drilling and the development of infrastructure in Vaca Muerta. This factor will affect our sales and results in the second half, when we expect that our sales volume will be 10% to 15% below those of the first half.”
Tenaris has been on the receiving end of negative earnings estimate revisions as of late. Looking at the current quarter, analysts have slashed estimates by -19.44% in the past 60 days. The Q3 Zacks Consensus Estimate is now $0.58/share, reflecting negative growth of -36.3% relative to the prior year.
Falling earnings estimates are a huge red flag and need to be respected. Negative growth year-over-year is the type of trend that bears like to see.
Technical Outlook
As illustrated below, TS stock is in a sustained downtrend. Notice how the stock has made a series of lower lows, widely underperforming the major indices. Also note that shares are trading below downward-sloping 50-day (blue line) and 200-day average (red line) moving averages – another good sign for the bears.
TS stock has experienced what is known as a “death cross,” whereby the stock’s 50-day moving average crosses below its 200-day moving average. The stock would have to make an outsized move to the upside and show increasing earnings estimate revisions to warrant taking any long positions. Shares have fallen nearly 17% this year alone.
Final Thoughts
A deteriorating fundamental and technical backdrop show that this stock is not set to make its way to new highs anytime soon. The fact that TS is included in one of the worst-performing industry groups provides yet another headwind to a long list of concerns. A history of earnings misses and falling future earnings estimates will likely serve as a ceiling to any potential rallies, nurturing the stock’s downtrend.
Potential investors may want to give this stock the cold shoulder, or perhaps include it as part of a short or hedge strategy. Bulls will want to steer clear of TS until the situation shows major signs of improvement.
Additional content:
Mortgage Rates Are Falling: A Boon for 2 Warren Buffett Stocks
Warren Buffett-led Berkshire Hathaway Inc.’s portfolio hasn’t fared badly against the S&P 500’s return amid a higher interest rate environment. However, Buffett hopes for interest rate cuts like several market pundits as it would jack up the share price of two of his beloved housing stocks NVR, Inc. and Lennar Corp. Here’s why –
Freddie Mac Report: U.S. Mortgage Rates Drop
According to Freddie Mac, for the week ending Sept. 12, the 30-year fixed-rate mortgage slipped to its lowest level since February 2023. The rate on the 30-year loan averaged 6.2%, down from the four-week and 52-week averages of 6.34% and 6.93%, respectively. The 30-year mortgage rate hovered around the 7% mark for most of the year, but since late July, it has begun to cool off and has fallen since then.
The 15-year fixed mortgage average rate was 5.27%, down from the four-week and 52-week averages of 5.47% and 6.21%, respectively, a positive development for aspiring homeowners, added Freddie Mac. Mortgage rates in the United States have continued to soften over the past year.
Why Are Mortgage Rates Falling?
An increase in expectations of a much-awaited interest rate cut in the Federal Reserve’s September policy meeting is pushing the yields on long-term bonds lower leading to a drop in mortgage rates.
The Fed is expected to trim interest rates as price pressures ebb toward the central bank’s 2% target. The interest rate cut would be the first one since March 2020, when the Fed slashed rates to boost economic growth derailed due to the pandemic. The interest rates have remained elevated for the past 14 months, waiting for economic conditions to improve.
According to the CME FedWatch Tool, around 59% of market participants expect the Fed to trim interest rates by 50 basis points in the upcoming policy meeting. Nearly 41% of traders are pricing in a quarter-point interest rate cut.
Drop in Mortgage Rates to Boost 2 Warren Buffett Stocks
The steady decline in mortgage rates on interest rate cut expectations should increase new home purchases, and boost homebuilders’ bottom line. Thus, two of Warren Buffett’s homebuilders, NVR and Lennar,are expected to see an increase in their stock prices.
After giving away his stake in D.R. Horton, Inc. DHI, the Oracle of Omaha hung onto these housing stocks as they would benefit from urbanization and a strong brand value. Berkshire Hathawayhas roughly $100 million of NVR shares and around $26 million of Lennar shares as of the company’s latest 13F filing, citing a CNBC article.
Key NVR Tailwinds: Increase in New Orders, Very Strong ROE
NVR’s profit margin is expected to improve as the company has witnessed an increase in new orders. In the second quarter, NVR’s new orders increased by 3% to 6,067 units from 5,905 units a year ago.
NVR has proficiently generated profits as the company’s return on equity (ROE) is 38.5%, more than the Building Products - Home Builders industry’s 18.3%. An ROE of more than 20% is usually considered very strong.
NVR’s expected earnings growth rate for the next five years is 7.6%. Its shares have gained 33.9% so far this year.
Key LEN Tailwinds: Dynamic Pricing Model, Lower Debt
Lennar is well-positioned to gain from its dynamic pricing model, which helps the company set prices based on demand trends and ever-changing market scenarios. This, in turn, aids Lennar in improving cash flow and return on inventory.
Lennar has a debt-to-equity of 8.3%, less than the industry’s 15.4%, a tell-tale sign that the company has less debt on its balance sheet than its peers, and can operate more efficiently in the long run.
LEN’s expected earnings growth rate for the next five years is 7.8%. Its shares have gained 24.7% year to date.
Fear Not, If the Fed Doesn’t Cut Rates
In the worst-cum-worst situation, if the Fed doesn’t cut interest rates, shares of NVR and Lennar would still scale upward, thanks to the presidential election in November. Kamala Harris, a Democratic nominee wants to boost construction activity and provide financial assistance to first-time home buyers.
Moreover, millennials are about to settle into a family life leading to increased demand for houses, a blessing for NVR and Lennar. Both stocks have a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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