Homebuilders Hit a Downdraft, and are on My Casualty List
Posted: January 19, 2021
January 18, 2021 (Maple Hill Syndicate) –- Not every stock that gets whacked deserves it.
Stocks may fall because of bad news that’s real but temporary. They may fall because a company sacrifices short-term profits for long-term benefits. They may fall because investors, moving as a herd, take a dislike to a particular industry.
That’s why I like to look for buy candidates among stocks that have been beaten up. In this column I compile a Casualty List of stocks that have been pummeled in the latest quarter, and that I think have good comeback potential.
The Casualty List you’re about to read is the 71st in a series that began in 2000. The average 12-month gain on my picks has been 15.2%, handily beating the 9.9% average for the Standard & Poor’s 500 Index. (Figures are total returns, including dividends.)
Of the 67 lists for which one-year returns can be calculated, 43 have been profitable and 34 have beaten the S&P 500.
Bear in mind that my column recommendations are hypothetical. They don’t reflect actual trades, trading costs or taxes. These results shouldn’t be confused with the performance of portfolios I manage for clients. Also, past performance doesn’t predict future returns.
The Casualty List from a year ago did well, led by a 63% gain in Auto Nation Inc. (AN). Greenbrier Companies Inc. (GBX) chipped in 41% and Meritage Homes returned 24%. The sole loser, Marathon Petroleum Corp. (MPC) dropped 18%.
All in all, the list returned 27.4%, beating the S&P 500’s performance of 15.2%.
In the fourth quarter, the stock market (as gauged by the S&P 500) was up about 12%. One group, however, took it on the chin. That was the homebuilders.
Paradoxically, homebuilders had benefitted from the pandemic. The threat of Covid-19 made the suburbs safer than the cities. Also, private homes are spacious enough to accommodate a home office, at a time when more people are working from home.
As the fourth quarter progressed, good news emerged on a Covid-19 vaccine. That helped many stocks, but hurt the homebuilders. I like the whole group. But here are three that stand out to me.
D.R. Horton Inc. (DHI) is one of the largest homebuilders, and one of the most diverse in the price points at which it sells its homes. Also, it has one of the better balance sheets, with debt 37% of stockholders’ equity.
Horton, which is based in Arlington, Texas, has also been one of the most consistent earners in the group. It has shown a profit for 11 fiscal years in a row. Its shares fell 9% in the fourth quarter.
LGI Homes Inc. (LGIH), by contrast, concentrates on the low-priced end of the single-family home market. I think this is a good niche, at a time when unemployment is high and economic growth is questionable.
LGI shares, which fell 9% last quarter, trade at only 10 times last year’s earnings and seven times this year’s estimated earnings.
Meritage Homes Corp. (MTH) was particularly hard hit, dropping 25%. It’s not quite so high-quality a name as Horton; the company posted losses four times in the past 15 years. But the fourth-quarter decline left the stock at only eight times trailing earnings and six times estimated earnings – alluring valuations in my opinion.
Why should demand for homes continue strong post-vaccine? Because millennials are reaching child-bearing age. I think that they, like their parents, will find single-family homes a desirable place to raise kids.
The fourth Casualty list stock I recommend today is Standard Motor Products Inc. (SMP). The company, based in Long Island City, New York, makes replacement parts for cars, especially ignition and electrical parts.
It sells mostly to auto-parts stores and distributors, such as O’Reilly automotive Inc., NAPA Auto Parts, and Advance Auto Parts. It has an 11-year (soon to be 12-year) profit streak going.
This small-cap company is largely ignored by Wall Street. Only three analysts follow it; two call it a buy.
Disclosure: I own D.R. Horton and LGI Homes personally and for most of my clients.
Correction: In my column a week ago, about the performance of the stocks that analysts most love at the beginning of each year, and the performance of those they most hate, I made a calculation error. Here are the corrected figures.
The analysts’ favorites fell 8.87% last year. Over 22 years, the analysts’ adored stocks have averaged a gain of 7.1%, while the despised ones have averaged a gain of 7.4%. I regret my error, but I believe the point I was making is unchanged.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at firstname.lastname@example.org.