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3 Homebuilding Stocks to Avoid as Housing Starts Slump

Due to high building costs and supply constraints, the housing market has slowed over the last month. As the demand for residential housing falters, we think it could be wise to now avoid homebuilding stocks PulteGroup (PHM), KB Home (KBH), and Meritage Homes (MTH). Let's discuss.

The demand for new houses and renovations rose significantly amid the pandemic, with residential construction hitting a 15-year high in March 2021. However, in July building activities took a step back, owing to the continuing supply constraints that construction companies face nationwide. Also, the housing industry has been adversely affected by surging inflation rates, which have raised housing prices substantially.

In July, housing starts declined 6% from the prior month for both single-family and multifamily projects. Supply constraints and elevated input costs are the major factors that led to the slump in the housing industry. According to senior economist George Ratiu at, “Builders pulled back on housing starts, wary of overcommitting on final new home prices in the face of volatile costs for land, materials and labor.”

So we think given the current volatility in the housing market, fundamentally weak stocks PulteGroup, Inc. (PHM), KB Home (KBH), and Meritage Homes Corporation (MTH) are best avoided now.

PulteGroup, Inc. (PHM)

PHM is primarily engaged in the home building business in the United States. The Atlanta, Ga., company acquires and develops land for residential purposes, and constructs housing on such land. It offers various home designs, including single-family detached, townhouses, condominiums, and duplexes.

On July 26, PHM announced a strategic plan  to build single-family rental projects in select PHM communities. The company expects to design and build approximately 7,500 new homes over the next five years. However, PHM is not expected to benefit immediately because the company plans to execute  the project over an extended term.

For the second quarter, ended June 30, PHM’s home sale revenues increased 31% year-over-year to $3.24 billion. However, its cash flow from operating activities declined 46.5% from its year-ago value to $432.07 million in the  six months ended June 30.

PHM has slumped 3% in price over the past five days to close yesterday’s trading session at $52.71. The stock has gained marginally over the past month.

Under POWR Ratings, PHM is ranked #5 among the 24 stocks in the Homebuilders industry. Get PHM ratings for Growth, Quality, Momentum, Value, Sentiment, and Stability, here.

KB Home (KBH)

KBH operates as a homebuilding company in the United States. The Los Angeles-based concern builds and sells various homes, including attached and detached single-family residential homes, townhomes, and condominiums, primarily for first-time, first move-up, second move-up, and active adult homebuyers. It has operations in Arizona, California, Colorado, Florida, Nevada, North Carolina, Texas, and Washington.

On August 20, KBH announced the grand opening of Spring Creek, a new, single-family home community in Spring, Texas. The company has been opening several new communities over the past couple of months. However, the housing market is currently dealing with supply constraints and elevated material costs, which could delay its ability to generate significant returns from its expansions.

KBH’s net income increased 115.2% year-over-year to $240.42 million in the six months ended May 31. However, its cash flow from operating activities came in at negative $18.07 million, representing a 111.7% decline year-over-year. Over the past five days, KBH shed 4.3% in price to close yesterday’s trading session at $41.90.

The stock has a D grade for Quality in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree. KBH is ranked #19 in the same industry.

To see additional KBH ratings for Growth, Value, Sentiment, Stability, and Momentum, click here.

Meritage Homes Corporation (MTH)

MTH designs and builds single-family homes in the United States. The company operates through two segments, Homebuilding, and Financial Services. It acquires and develops land, and constructs, markets, and sells homes for first-time and first move-up buyers. The Scottsdale, Ariz., company also offers title insurance and closing/settlement services to its homebuyers.

MTH’s net earnings increased 85% year-over-year to $167.39 million in its  fiscal second quarter ended June 30. However, the company reported 3,542 in total orders , reflecting a 2% decrease year-over-year. Also, its cash flow from operating activities declined 160.4% from its year-ago value to a negative $143.47 million for the six months ended June 30.

MTH has gained 6.9% in price over the past year. However, the stock has declined 4% over the past five days to close yesterday’s trading session at $109.06.

The company is ranked #13 in the Homebuilders industry. We have rated MTH for Growth, Value, Stability, Sentiment, Momentum, and Quality. To see more of MTH’s component grades, click here.

PHM shares were trading at $52.34 per share on Monday afternoon, down $0.37 (-0.70%). Year-to-date, PHM has gained 22.04%, versus a 20.60% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.


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