Housing is coming back in a big way! Residential builders have been off the radar for most people as potential investments for the last five years. Since bottoming in September 2011, the stocks and prospects for residential construction firms have been on a steady rise. These businesses currently offer an excellent opportunity to investors who act now to receive exceptional returns for the next three to five years as this already established trend runs its course.
A speculative opportunity inside a strong trend
KB Home (NYSE:KBH) is a business that was truly decimated with the collapse of the housing industry and is still experiencing its share of negative headwinds. It is diligently working to implement a plan designed to alleviate many of the issues facing its operations and is planning to issue new stock to raise capital and reduce debt. The market has reacted positively to the actions taken by the company and the share price has been moving up.
Some of the major issues facing the business are slow projected growth in five-year forward earnings of only 4%, a very heavy debt-to-equity ratio of 4.15 and a PEG ratio of almost 5. If the turnaround plan being implemented is successful, the stock could soar. For those with the willingness and ability to perform deep due diligence and accurately assess the prospects for the KB Home (NYSE:KBH) turnaround plan’s success, the opportunities for profit are enormous. For those lacking the time or ability to perform this evaluation, the risk of investing would be enormous. Unless an investor possesses the special skills needed, this is a good stock to avoid until more of the story unfolds.
Two household names for building households
The Ryland Group, Inc. (NYSE:RYL) and PulteGroup, Inc. (NYSE:PHM) are literally household names in the homebuilding industry and, in many ways, their market values put them in close proximity to each other. Both businesses have current P/E ratios over 35 but forward ratios around 14 to 15. They also have projected five-year earnings growth rates of 10%, price-to-book multiples around 3.65 and are priced at about 33 times cash flow.
While the price-to-cash-flow ratio of these businesses is only around 3.3%, both of these businesses are well positioned to see rising share prices as the momentum in this cyclical market continues to build and garner more media attention. Of the two, The Ryland Group, Inc. (NYSE:RYL) may have better prospects for investment performance over the near term as analysts’ earnings expectations for 2014 have risen about 20% in the last 90 days, while the 2014 expectations for PulteGroup, Inc. (NYSE:PHM) have fallen by about 3.6% over the same period.