In this article, we discuss 5 housing stocks to watch as price declines continue. If you want to see more stocks in this list, check out “Globally Synchronized Downturn”: 10 Housing Stocks to Watch as Price Declines Continue.
5. CBRE Group, Inc. (NYSE:CBRE)
Number of Hedge Fund Holders: 42
CBRE Group, Inc. (NYSE:CBRE) is a Texas-based commercial real estate services and investment company. The company specializes in property sales and mortgage services, as well as construction management, marketing, and building engineering. On August 23, CBRE Group, Inc. (NYSE:CBRE)’s board approved a $2 billion increase to its stock repurchase authorization, effective immediately. CBRE Group, Inc. (NYSE:CBRE) is one of the prominent housing stocks to watch as price declines continue.
UBS analyst Alex Kramm on September 21 lowered the price target on CBRE Group, Inc. (NYSE:CBRE) to $86 from $95 and maintained a Neutral rating on the shares as part of a broader research note on Real Estate brokers. The analyst noted that macro uncertainty for the group is rising, though he also sees it as being “priced in” by the stocks.
According to Insider Monkey’s data, CBRE Group, Inc. (NYSE:CBRE) was part of 42 hedge fund portfolios at the end of Q2 2022, compared to 55 funds in the last quarter. Harris Associates is the biggest stakeholder of the company, with 11.5 million shares worth about $845 million.
Here is what Third Avenue Management specifically said about CBRE Group, Inc. (NYSE:CBRE) in its Q2 2022 investor letter:
“Always ones to favor a company’s prospects for long-term wealth creation over its near-term earnings outlook, Fund Management opted to add to the Fund’s position in the common stock of CBRE Group, Inc. (NYSE:CBRE) during the quarter. Held in the Fund since 2020, CBRE is the largest commercial real estate services firm globally with a market-leading position in leasing, property sales, facilities management, and valuation. CBRE is also a major player in investment management (with nearly $150 billion of assets under management) and loan servicing (approximately $340 billion of commercial and multi-family loans under administration). In combination, these segments essentially act as a tax on commercial real estate activity and accounted for more than $27 billion in revenues in the 2021 fiscal year.
Fund Management recognizes that the company’s transaction-oriented business lines (e.g., leasing and sales) are likely to retract from more recent levels. Notwithstanding, CBRE’s business model has evolved significantly in recent years with additions in facilities management, investment management, and servicing leading to substantial “recurring” revenue streams. Further, the company has amongst the most “variable” cost structures in the industry, and it is also incredibly well capitalized with a “net-cash” position. As a result, CBRE seems likely to not only remain profitable when viewed on a group-wide basis but also set to take market share through “lift-outs” from competitors and “bolt-on” acquisitions in ancillary activities.
One emerging area of the commercial real estate market that CBRE seems particularly well-suited to capitalize on is the shift to “flexible” office arrangements. More specifically, the company is serving as a key advisor to corporations as they seek to right-size their real estate footprints with an increased focus on “hybrid” working arrangements (CBRE counts 90% of Fortune 100 companies as clients). It is also a principal investor in Industrious—one of the leading flexible workplace solutions globally, with unmistakable advantages relative to a number of its peers. It is therefore Fund Management’s view that this specific opportunity will be a key driver as the company pursues its 2025 earnings target of $8 per share.”
4. D.R. Horton, Inc. (NYSE:DHI)
Number of Hedge Fund Holders: 44
D.R. Horton, Inc. (NYSE:DHI) was founded in 1978 and is headquartered in Arlington, Texas. It operates as a homebuilding company in the United States under the D.R. Horton, America’s Builder, Express Homes, Emerald Homes, and Freedom Homes brands. It is one of the top housing stocks to watch as price declines continue.
On August 31, Raymond James analysts Buck Horne and Andrew Cooper added D.R. Horton, Inc. (NYSE:DHI) to Raymond James’ “Analyst Current Favorites” list, which contains present favorite stock ideas from the analysts in the firm’s equity research team. On September 19, KeyBanc analyst Kenneth Zener upgraded D.R. Horton, Inc. (NYSE:DHI) to Overweight from Sector Weight with an $84 price target.
According to the second quarter database of Insider Monkey, 44 hedge funds held stakes worth $1.92 billion in D.R. Horton, Inc. (NYSE:DHI), compared to 52 funds in the prior quarter worth $1.95 billion. John Armitage’s Egerton Capital Limited is the largest stakeholder of the company, with 7.6 million shares valued at $504 million.
Here is what Third Avenue Management specifically said about D.R. Horton, Inc. (NYSE:DHI) in its Q2 2022 investor letter:
“D.R. Horton, Inc. (NYSE:DHI) is the largest homebuilder in the US by volume (the company sold more than 90k homes in the past year) with a well-recognized focus on delivering quality product at the entry-level price point (its average selling price is less than $400k) and market-leading positions in key Sunbelt markets.
While the near-term outlook for DR Horton remains uncertain given the adjustments occurring in the US residential markets, the medium-to-long-term prospects for volume-based homebuilders with super-strong balance sheets and scale advantages continue to be promising in Fund Management’s view. More specifically, (i) residential inventories remain around record-low levels in most major markets when gauged by aggregate units available (see chart below), (ii) demand for single-family residences seem to have multiple secular drivers as the largest generation in US history (the “millennial cohort”) enters its prime home buying years and desires more space not only due to “life events” but also “remote” and “hybrid” working arrangements, and (iii) significant inflation in rental rates for multi-family units in urban areas has left the rent-toown proposition for single-family homes in suburban areas in a compelling range (particularly in the Sunbelt region which is experiencing outsized job growth and wage growth relative to broader national figures).
In Fund Management’s view, the two industry participants that seem most likely to take part in this shift include DR Horton and Lennar Corp. (a long-held position in the Fund). In conjunction, these two “blue-chip builders” now account for approximately 10% of the Fund’s capital, as well as roughly one out of every five new homes built in the Sunbelt. They would also qualify under Third Avenue Founder Marty Whitman’s “Safe and Cheap” maxim as both companies are nearly “net-cash” (i.e., more cash than debt) with common stocks trading at less than five times trailing earnings, on average.”
3. Lennar Corporation (NYSE:LEN)
Number of Hedge Fund Holders: 47
Lennar Corporation (NYSE:LEN) is a Florida-based homebuilder that operates through Homebuilding East, Homebuilding Central, Homebuilding Texas, Homebuilding West, Financial Services, Multifamily, and Lennar Other segments. It is an important housing stock to watch in the current market backdrop.
BTIG analyst Carl Reichardt on September 23 maintained a Buy rating on Lennar Corporation (NYSE:LEN) but lowered the price target on the shares to $92 from $97. The company’s Q3 earnings outperformed expectations, though the management also stressed on adjusting prices and climbing incentives to find a “market clearing price” for homes in production, the analyst told investors. He added that he is lowering his gross margin expectations and trimming his 2022 EPS estimate to $17.57 from $18.09 and 2023 to $12.70 from $15.39, though he continues to favor Lennar Corporation (NYSE:LEN)’s transformation to a “faster-turn, deeper market share, more capital-efficient business”.
According to Insider Monkey’s Q2 data, 47 hedge funds were bullish on Lennar Corporation (NYSE:LEN), compared to 50 funds in the preceding quarter. Greenhaven Associates is the leading stakeholder of the company, with 9.3 million shares worth $657.7 million.
2. Lowe’s Companies, Inc. (NYSE:LOW)
Number of Hedge Fund Holders: 53
Lowe’s Companies, Inc. (NYSE:LOW) is a North Carolina-based home improvement retailer. On September 1, Atlantic Equities analyst Sam Hudson said the “robust” three-year comp trends at Lowe’s Companies, Inc. (NYSE:LOW), despite cautious commentary from several suppliers, indicate the company’s unique and diversified market position. With this demand underpinned by over 40% house price appreciation in two years, the solid long-term trends should prevail, as per the analyst. He acknowledged the short-term recession risk but believes the market is already pricing in more than 18% earnings drop in fiscal 2023 at Lowe’s Companies, Inc. (NYSE:LOW). However, flat or even low-single-digit growth is achievable, contended the analyst. He reaffirmed an Overweight rating on Lowe’s Companies, Inc. (NYSE:LOW), citing an attractive risk/reward profile.
According to Insider Monkey’s data, Lowe’s Companies, Inc. (NYSE:LOW) was part of 53 hedge fund portfolios at the end of June 2022, compared to 65 funds in the prior quarter. Bill Ackman’s Pershing Square is the largest stakeholder of the company, with 10.20 million shares worth $1.8 billion.
Here is what Pershing Square Holdings specifically said about Lowe’s Companies, Inc. (NYSE:LOW) in its Q2 2022 investor letter:
“Lowe’s Companies, Inc. (NYSE:LOW)’s is a high-quality business with significant long-term earnings growth potential underpinned by a superb management team that is successfully executing a multi-faceted business transformation.
COVID-19 was a transformational event for the US housing market, causing homeowners to invest significantly in their homes as they shifted nearly all their daily activities to the home environment, including work, school, and leisure. The increased use of the home during COVID, in turn, increased the need for repair, maintenance and remodel activity, which significantly benefited Lowe’s same-store sales. As consumers return to spending more time and money on out-of-the home activities the near-term demand for certain Do-It-Yourself (“DIY”) categories has decreased. Moderation in DIY demand combined with increased mortgage rates and decreased housing affordability has caused many market participants to become concerned that the home improvement industry may give up a significant part of their COVID pandemic sales gains.
While we expect that there will be some near-term volatility and continued moderation of DIY demand, growth remains strong for projects requiring professional installation (the “Pro” business) due to a substantial backlog of projects undertaken during COVID, which should support industry growth in the near-term. In addition, we believe the medium[1]term growth outlook for the home improvement industry remains strong as demand is likely to normalize at a materially higher level as compared to the pre-COVID era. For the decade prior to COVID, home improvement industry sales were notably depressed relative to their long-term averages as a percentage of overall consumer spend and GDP and have only now returned to their longer-term historical levels. Moreover, we believe COVID has permanently renewed consumers’ focus, appreciation, and utilization of their homes, which combined with higher home equity values, strong consumer balance sheets, low levels of home inventory for sale and an aging housing stock that requires an increasing level of maintenance, will likely result in a structurally higher level of ongoing home industry spending in the future. In the most recent quarter demand strengthened throughout the quarter as DIY consumers returned from summer vacations and focused on less seasonal home improvement projects…” (Click here to read the full text)
1. Builders FirstSource, Inc. (NYSE:BLDR)
Number of Hedge Fund Holders: 53
Builders FirstSource, Inc. (NYSE:BLDR) is a Texas-based manufacturer and supplier of building materials, engineered components, and construction services to professional homebuilders, sub-contractors, remodelers, and consumers in the United States. Builders FirstSource, Inc. (NYSE:BLDR) is one of the most prominent housing stocks to monitor as price declines continue.
In early August, the company posted strong Q2 2022 results and updated guidance for the year. Builders FirstSource, Inc. (NYSE:BLDR) sees 2022 adjusted EBITDA margin growing by 120 to 160 basis points, compared to 90 to 110 bps in the previous target. Similarly, free cash flow for 2022 is expected to be $2.5 billion-$3 billion, versus $2 billion-$2.4 billion in the prior guidance. On August 17, Deutsche Bank analyst Joseph Ahlersmeyer initiated coverage of Builders FirstSource, Inc. (NYSE:BLDR) with a Buy rating and a $93 price target.
Among the hedge funds tracked by Insider Monkey, 53 funds were bullish on Builders FirstSource, Inc. (NYSE:BLDR) at the end of June 2022, compared to 57 funds in the previous quarter. Coliseum Capital is the biggest position holder in the company, with 6.46 million shares worth $347 million.
Black Bear Value Partners mentioned the company in its Q1 2022 investor letter. Here is what the fund said:
“Builders FirstSource is a supplier and manufacturer of building materials for professional homebuilders, subcontractors, remodelers, and consumers. Their products include factory-built roof and floor trusses, wall panels and stairs, vinyl windows and custom millwork.
The fundamental discussion about homebuilders applies to BLDR. As more homes are built across the country, there will be an increased need for scaled sourcing of products to homebuilders. There is a large amount of fragmentation in the supply chain which provides BLDR a long runway for acquisitions and realistic synergies.
The management team has been using their prodigious free cash flow to both acquire new businesses and buy in their stock. While I historically always liked their business, their historic high-debt levels gave me pause. They have right sized their balance sheet and are taking a very thoughtful view on capital allocation on behalf of shareholders.
BLDR should be able to generate $7-$10 a share in cash in the medium term with significant upside if they can scale through acquisition and/or further penetrate existing markets. We own it at a 11-15% free-cash flow yield so little growth is needed for us to compound value at high rates.”
You can also take a look at Best Commodity Stocks To Buy and Best Stocks To Invest In.
