Deep Dive: These 3 stock screens can help find value amid a boom in U.S. housing shares

December 15
01:05 2017

No doubt you’ve seen or heard reports about a housing shortage in the U.S. While this can make it difficult to buy a home, it can make you plenty of money as an investor, as long as the trend continues.

Let’s take a broad look at dozens of housing-related stocks to find value.

First, the big picture. This chart shows a very healthy market for sellers of new homes in the past five years, after the housing-market collapse and the 2008 financial crisis:

Also see: Why rentals are up, and what it means for the housing market

Here’s how the SPDR S&P Homebuilders ETF XHB, -0.88% has performed this year through Dec. 12 against the S&P 500 Index SPX, -0.32% :

The ETF tracks the S&P Homebuilders Select Industry Index, which includes 37 S&P 500 companies that build homes or provide related products or services.

Here’s a 10-year chart comparing the total return of the ETF with the S&P 500, through Dec. 12:

Of course, in December 2007, the housing-market collapse had already started and the forward-looking stock market had already sent shares of home builders and related companies plunging.

Looking instead at an 11-year chart, the story changes to show a cyclical industry that can still perform very well over long periods:

Other factors influence the housing market, of course, both nationally and regionally. There’s no sign of a slowdown for the U.S. economy, but the Federal Reserve is slowly and steadily raising short-term rates. Mortgage loan rates are still very low, but nobody knows how the tax-reform legislation that may be passed and signed into law by President Trump as early as next week might affect the housing market.

Read: There will be ‘financial strain’ from tax-law change, home buyers say

If you believe in the long-term strength of U.S. housing and are looking for a broad long-term investment, you might simply go with the SPDR S&P Homebuilders ETF and its 36 holdings. Another option is the iShares U.S. Home Construction ETF ITB, -0.26% which tracks the Dow Jones U.S. Select Home Construction Index and has 47 stock holdings. Even so, it is much more heavily concentrated in stocks of the largest home builders.

The iShares ETF’s five largest holdings are all home builders, and they make up 45% of the fund. The fund has returned 54% through Dec. 12. The SPDR ETF’s top five holdings are four home builders and Home Depot (No. 5) that together comprise 25% of the fund. That fund has returned 28%, and the S&P 500 has returned 21% this year.

A short-term look at the components of XHB

We focused our screens on the SPDR S&P Homebuilders ETF. Here are its components, ranked by how much their sales for the past 12 reported months (through Dec. 12) increased from the year-earlier 12-month period:

Company Ticker Industry Change in sales per share – past 12 months from year-earlier 12-month period Gross margin – past 12 months Gross margin – year-earlier 12-month period Total return – 2017 through Dec. 12
LGI Homes Inc. LGIH, -0.49% Homebuilding29%26.25%26.24%146%
Installed Building Products Inc. IBP, +3.53% Building Products29%27.01%27.81%69%
PulteGroup Inc. PHM, -0.93% Homebuilding28%22.55%21.56%86%
William Lyon Homes Class A WLH, +0.68% Homebuilding24%17.28%17.99%48%
Century Communities Inc. CCS, -0.67% Homebuilding20%18.39%20.13%40%
iRobot Corp. IRBT, -0.77% Electronics/ Appliances19%50.20%47.39%20%
M.D.C. Holdings Inc. MDC, -0.86% Homebuilding17%16.69%16.53%35%
Toll Brothers Inc. TOL, -0.04% Homebuilding17%21.60%19.84%53%
Lowe’s Cos. LOW, -0.10% Home Improvement chains16%32.16%32.26%22%
Lennar Corp. Class B LEN.B, -0.19% Homebuilding16%21.44%22.09%46%
Lennar Corp. Class A LEN, -0.02% Homebuilding16%21.44%22.09%46%
D.R. Horton Inc. DHI, +0.88% Homebuilding15%21.63%21.84%85%
Taylor Morrison Home Corp. Class A TMHC, +0.30% Homebuilding14%18.70%19.39%21%
Owens Corning OC, -0.96% Construction Materials14%24.78%24.75%70%
A.O. Smith Corp. AOS, -1.26% Building Products13%41.10%41.58%30%
M/I Homes Inc. MHO, -1.21% Homebuilding12%20.96%22.47%36%
Lennox International Inc. LII, -0.85% Building Products11%29.33%29.23%36%
Home Depot Inc. HD, -0.42% Home Improvement Chains11%32.28%32.32%39%
CalAtlantic Group Inc. CAA, -0.06% Homebuilding11%21.24%22.04%62%
TopBuild Corp. BLD, +2.14% Building Products10%24.02%23.17%83%
NVR Inc. NVR, +0.44% Homebuilding10%19.47%19.43%102%
Cavco Industries Inc. CVCO, -0.28% Homebuilding10%22.39%22.20%40%
Bed Bath & Beyond Inc. BBBY, -4.06% Specialty Stores9%37.02%37.83%-42%
Fortune Brands Home & Security Inc. FBHS, -0.65% Building Products8%36.17%35.29%27%
Allegion PLC ALLE, -0.99% Building Products7%43.85%43.93%29%
Masco Corp. MAS, -0.50% Building Products7%34.11%32.96%35%
Whirlpool Corp. WHR, -2.21% Electronics/ Appliances6%16.48%17.82%-6%
Mohawk Industries Inc. MHK, -1.06% Home Furnishings6%31.93%31.75%38%
Williams-Sonoma Inc. WSM, -3.77% Specialty Stores6%36.73%36.73%8%
Leggett & Platt Inc. LEG, +0.83% Home Furnishings4%22.20%24.14%-3%
Helen of Troy Ltd. HELE, +1.04% Electronics/ Appliances4%43.90%42.73%8%
Aaron’s Inc. AAN, -4.37% Finance/ Rental/ Leasing3%47.03%47.45%13%
Tempur Sealy International Inc. TPX, -1.45% Home Furnishings2%41.72%41.72%-11%
Johnson Controls International PLC JCI, -0.58% Misc. Commercial Services2%30.85%25.01%-5%
Tri Pointe Group Inc. TPH, -0.80% Homebuilding1%21.48%23.60%52%
USG Corp. USG, -1.05% Construction Materials-15%20.86%23.13%28%
Source: FactSet

You can click the tickers for more information on each company, including news, price ratios, financials and filings.

We are showing sales per share, rather than raw revenue, because the per-share figures incorporate any dilution from the issuance of new shares for any reason (including to pay for acquisitions) as well as any decline in the share count brought about by stock buybacks.

A company’s gross profit margin is sales, less the cost of goods or services sold, divided by sales. It is a measure of profitability for the core business and reflects pricing power. A declining margin might mean that a company has been forced to offer more discounts to defend its market share or to increase sales.

Here’s the list again, in the same order, with summaries of the opinions of sell-side analysts polled by FactSet:

Company Ticker Share ‘buy’ ratings Share neutral ratings Share ‘sell’ ratings Closing price – Dec. 12 Consensus price target implied 12-month upside potential
LGI Homes Inc. LGIH, -0.49% 33%67%0%$ 70.73$ 65.60-7%
Installed Building Products Inc. IBP, +3.53% 75%25%0%$ 69.80$ 73.866%
PulteGroup Inc. PHM, -0.93% 36%59%5%$ 33.69$ 30.97-8%
William Lyon Homes Class A WLH, +0.68% 40%60%0%$ 28.25$ 30.888%
Century Communities Inc. CCS, -0.67% 100%0%0%$ 29.50$ 33.8015%
iRobot Corp. IRBT, -0.77% 22%67%11%$ 70.40$ 72.603%
M.D.C. Holdings Inc. MDC, -0.86% 0%64%36%$ 31.17$ 28.39-9%
Toll Brothers Inc. TOL, -0.04% 48%48%4%$ 47.09$ 48.864%
Lowe’s Cos. LOW, -0.10% 53%44%3%$ 84.99$ 88.104%
Lennar Corp. Class B LEN.B, -0.19% 52%48%0%$ 49.29$ 61.5425%
Lennar Corp. Class A LEN, -0.02% 52%48%0%$ 61.43$ 61.540%
D.R. Horton Inc. DHI, +0.88% 52%48%0%$ 50.00$ 49.05-2%
Taylor Morrison Home Corp. Class A TMHC, +0.30% 8%92%0%$ 23.35$ 24.756%
Owens Corning OC, -0.96% 64%36%0%$ 86.98$ 90.354%
A.O. Smith Corp. AOS, -1.26% 43%57%0%$ 61.06$ 64.295%
M/I Homes Inc. MHO, -1.21% 100%0%0%$ 34.26$ 36.507%
Lennox International Inc. LII, -0.85% 24%76%0%$ 206.68$ 193.33-6%
Home Depot Inc. HD, -0.42% 71%29%0%$ 181.80$ 188.093%
CalAtlantic Group Inc. CAA, -0.06% 7%93%0%$ 54.75$ 49.05-10%
TopBuild Corp. BLD, +2.14% 71%29%0%$ 65.24$ 73.1412%
NVR Inc. NVR, +0.44% 11%78%11%$ 3,368.97$ 3,231.00-4%
Cavco Industries Inc. CVCO, -0.28% 100%0%0%$ 140.00$ 164.0017%
Bed Bath & Beyond Inc. BBBY, -4.06% 4%71%25%$ 23.18$ 22.83-1%
Fortune Brands Home & Security Inc. FBHS, -0.65% 50%50%0%$ 67.23$ 71.216%
Allegion PLC ALLE, -0.99% 55%45%0%$ 82.15$ 89.789%
Masco Corp. MAS, -0.50% 68%32%0%$ 42.19$ 44.636%
Whirlpool Corp. WHR, -2.21% 36%64%0%$ 166.51$ 187.1312%
Mohawk Industries Inc. MHK, -1.06% 78%22%0%$ 275.34$ 294.847%
Williams-Sonoma Inc. WSM, -3.77% 14%64%22%$ 50.90$ 49.57-3%
Leggett & Platt Inc. LEG, +0.83% 44%56%0%$ 46.33$ 54.8618%
Helen of Troy Ltd. HELE, +1.04% 60%20%20%$ 90.90$ 104.2515%
Aaron’s Inc. AAN, -4.37% 82%18%0%$ 36.02$ 47.1431%
Tempur Sealy International Inc. TPX, -1.45% 36%55%9%$ 61.00$ 66.148%
Johnson Controls International PLC JCI, -0.58% 37%58%5%$ 38.25$ 44.2916%
Tri Pointe Group Inc. TPH, -0.80% 58%42%0%$ 17.42$ 17.953%
USG Corp. USG, -1.05% 10%76%14%$ 36.92$ 33.71-9%
Source: FactSet

While there are majority “buy” or equivalent ratings for 18 out of the ETF’s 36 components, the analysts’ price targets for most of them aren’t particularly aggressive.

A longer-term look

The first table showed sales per share and gross margin. It’s good if both are going up, of course, but these figures don’t incorporate other expenses or other problems companies face.

There’s a new tool that you can use to make useful comparisons of companies to their industry competitors. It’s called return on corporate capital (ROCC) and was recently developed by the Shareholder Forum to help individual investors screen companies for quality.

The calculation is similar to return on invested capital (ROIC), but there are some differences. There’s no strict definition for ROIC. ROCC is calculated the same way for every company that’s publicly traded in the U.S., using annual data filed with the Securities and Exchange Commission: Net income plus interest expense and income taxes, divided by the ending balance of total assets less current liabilities other than interest-bearing debt.

The idea is to measure how good a company’s management is at investing the money it raises or borrows. Each company’s ROCC is compared to its industry competitors, based on the company’s Standard Industrial Classification (SIC), which also comes from SEC filings. In other words, the subject company’s numbers are excluded from those of its industry SIC group when the comparison is made. The comparisons are available here for free.

ROCC comparisons are most meaningful within industries. Banks, for example, tend to have lower ROCC than many other industries because it is their business to leverage capital by gathering deposits and borrowing money.

Here’s a sample comparison of LGI Homes Inc. LGIH, -0.49%  to its SIC industry group:

You can see that the company’s average ROCC for five years has been well above that of its industry competitors, and that the numbers have been sloping upward over the past two years.

Here are the components of the SPDR S&P Homebuilders ETF again, in the same order, with average ROCC comparisons to their industry groups.

Company Ticker Five-year average ROCC Five-year average ROCC for SIC group SIC group
LGI Homes Inc. LGIH, -0.49% 13.8%6.2%Operative Builders
Installed Building Products Inc. IBP, +3.53% 11.8%7.4%General Building Contractors – Residential Buildings
PulteGroup Inc. PHM, -0.93% 7.0%6.1%Operative Builders
William Lyon Homes Class A WLH, +0.68% 4.4%6.3%Operative Builders
Century Communities Inc. CCS, -0.67% 6.8%7.1%Operative Builders
iRobot Corp. IRBT, -0.77% 12.5%10.4%Household Appliances
M.D.C. Holdings Inc. MDC, -0.86% 4.6%6.3%Operative Builders
Toll Brothers Inc. TOL, -0.04% 4.7%6.4%Operative Builders
Lowe’s Cos. LOW, -0.10% 15.5%29.2%Retail – Lumber and Other Materials Dealers
Lennar Corp. Class B LEN.B, -0.19% 7.0%9.1%General Building Contractors – Residential Buildings
Lennar Corp. Class A LEN, -0.02% 7.0%9.1%General Building Contractors – Residential Buildings
D.R. Horton Inc. DHI, +0.88% 11.1%5.2%Operative Builders
Taylor Morrison Home Corp. Class A TMHC, +0.30% 0.3%6.6%Operative Builders
Owens Corning OC, -0.96% 6.1%0.7%Abrasive Asbestos and Misc. Nonmetallic Mineral Products
A.O. Smith Corp. AOS, -1.26% 16.9%9.5%Household Appliances
M/I Homes Inc. MHO, -1.21% 6.0%6.2%Operative Builders
Lennox International Inc. LII, -0.85% 27.1%18.9%Air Conditioning and Warm Air Heating Equipment and Commercial and Industrial Refrigeration Equipment
Home Depot Inc. HD, -0.42% 31.0%14.6%Retail – Lumber and Other Materials Dealers
CalAtlantic Group Inc. CAA, -0.06% 6.1%6.2%Operative Builders
TopBuild Corp. BLD, +2.14% 6.1%3.1%Construction Special Trade Contractors
NVR Inc. NVR, +0.44% 19.9%5.6%Operative builders
Cavco Industries Inc. CVCO, -0.28% 8.3%N/AMobile Homes
Bed Bath & Beyond Inc. BBBY, -4.06% 32.8%19.0%Retail – Home Furniture, Furnishing and Equipment Stores
Fortune Brands Home & Security Inc. FBHS, -0.65% 10.0%6.7%General Building Contractors – Residential Buildings
Allegion PLC ALLE, -0.99% 17.9%-34.4%Detective, Guard and Armored Car Services
Masco Corp. MAS, -0.50% 15.4%4.8%Millwood, Veneer, Plywood and Structural Wood Members
Whirlpool Corp. WHR, -2.21% 9.5%14.5%Household Appliances
Mohawk Industries Inc. MHK, -1.06% 9.7%N/ACarpets and Rugs
Williams-Sonoma Inc. WSM, -3.77% 30.4%26.5%Retail – Home Furniture, Furnishing and Equipment Stores
Leggett & Platt Inc. LEG, +0.83% 15.8%14.6%Household Furniture
Helen of Troy Ltd. HELE, +1.04% 10.3%N/AElectric Housewares and Fans
Aaron’s Inc. AAN, -4.37% 13.8%7.2%Services – Equipment Rental and Leasing
Tempur Sealy International Inc. TPX, -1.45% 15.2%15.1%Household Furniture
Johnson Controls International PLC JCI, -0.58% 11.4%8.4%Misc. Business Services
Tri Pointe Group Inc. TPH, -0.80% 11.4%6.3%Operative Builders
USG Corp. USG, -1.05% 9.5%5.8%Concrete, Gypsum and Plaster Products
Source: The Shareholder Forum

If fewer than five years of data is available for a company, the average ROCC used for the comparisons in the table is for the number of full years of data available. If there is no average ROCC number available for a company’s competitors, it means there are fewer than four other publicly traded companies within that SIC group.

You can review more detailed ROCC data for each company here.

Related Articles