How To Play The Homebuilders: 14% Return in 120 Days

Investing for “safety” is a tricky move to pull off these days. Fixed income vehicles are yielding next to nothing, and expected to yield even less in the coming months. There’s always the temptation to go further down the safety spectrum and take some risk. But and investment in hot tech stocks have also come under pressure lately.

So, what’s the likely hood of adding some “juice” to your portfolio, and still not take on too much risk – at least in the short-term.

Well, there is undoubtedly an opportunity for doing just that. Invest in homebuilders!

Analysis

Even though the broader S&P 500 Index has chugged higher, along with many of its component stocks, at the time of writing this article, it’s still down by 3.7% over the past six months. Even if you measure the period between March 28, 2018 (closing: 2,605) and Dec 3rd, 2018 (Closing: 2,790) – just before things went horribly wrong for equity markets in general – the S&P was up only 7.1%.

That’s nowhere close to the 19.1% gain the index gave us over two years from March 2017 to today. But something changed in the past six months, or so that clearly brought the index back to life. There are many factors that analysts can point to for this behavior, but for the purpose of our analysis on home builders, we’ll focus on mortgage rates and other housing-related data points.

Over the last 6-months or so, we’ve seen mortgage rates in the US decline sharply. From its Nov 15, 2018 high of nearly 5%, the average 30-year fixed rate is down to 4.28% – and expected to fall still. Despite the overall “gloom and doom” of trade wars, tariffs, and sanctions, consumers are feeling optimistic about home affordability – thanks primarily due to declining mortgage rates.

But that’s just one side of the story – the demand side.

Where there is demand, there also needs to be supply for an industry to survive and thrive – and that’s exactly what’s about to happen later this year and into the next in the housing sector!

According to forecasts from the National Association of Homebuilders, housing starts are poised to continue to increase between now and the end of 2020. In fact, by next year, new starts are expected to hit nearly 1.3 million units – a record that we haven’t seen in a long time!

So, we have declining mortgage rates, homebuyer confidence returning to the market, and home builders ready to step back into the ring to give consumers what they want – more homes. And with spring-time upon us, a period where home sellers and buyers traditionally list and buy their homes, it’s likely that the next few weeks will prove even more accretive for the housing sector.

Given that all the data points are aligning to support homebuilders, it only makes sense that you should look to building your own portfolios with a couple of homebuilder stocks.

The Play

The question now is: How do you play the homebuilders to build a portfolio that’ll give you reasonable returns? Well, there are any number of ways that you can do so, and we’ll talk about a couple of them here.

HOW YOU COULD TURN “EXTRA CASH” LYING AROUND YOUR HOUSE INTO THOUSANDS OF DOLLARS IN AS LITTLE AS 23 DAYS

The ETF Approach

One way to play this thesis is to hold a basket of homebuilder stocks. A great way to do that is through an ETF that represents that space.

The iShares U.S. Home Construction ETF (ITB) is a product that’s done very well since the beginning of the year. ITB is up over 17% YTD, beating its benchmark by a country mile!

Investors must be conscious though that there is an Expense Ratio that they’ll pay for this product, though at 0.43% that doesn’t seem overly expensive. ITB’s yield is 0.55% at the time of this writing.

Another ETF option may be the SPDR S&P Homebuilders ETF (XHB).

On a YTD basis, yielding nearly 19%, XHB has fared much better than peer ITB and its broader benchmark index. At 1.06%, XHB has a much higher yield than ITB, and it also has a lower Expense Ratio – 0.35% – than ITB.

Picking Individual Names

If you prefer to do it yourself and don’t like the idea of paying a management fee to money managers of ETFs, then perhaps you can buy individual homebuilder stocks for your portfolio.

Three picks worth considering might be:

  • Beazer Homes USA, Inc. (BZH)
  • Lennar Corporation (LEN), and
  • D.R. Horton, Inc. (DHI)

As you can see from the side-by-side comparison of the individual stocks, against the ETFs and the broader S&P 500 index, the individual picks have performed spectacularly over the past 120-days. All three of our picks have outperformed the Index as well as a basket of peer stocks as represented by the ETF holdings.

A portfolio of just these three picks held over the past 120-days would have yielded nearly 14% return. That’s a whopping improvement over the single-digit performance of the ETFs or the Index as a whole. And although that return does not factor in trading fees associated with adding (and ultimately selling) individual names to your portfolio, the net returns will certainly be higher. Besides, DHI (1.41%) and LEN (0.31%) also offer a small dividend that investors should factor into the equation.

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The author does not have an investment in stock discussed in this article.

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