3 Homebuilding Stocks Poised for Further Gains in 2021: D. R. Horton, KB Home, and Lennar

Stocks finished the day lower due to renewed COVID-19 concerns and whether a larger stimulus bill would be passed in the near-term. This retreat followed a shortened week in which the indexes continued to reach record highs. 

While investor focus is currently on fiscal stimulus to help drive the economic rebound, one bright spot in a weak economy has been homebuilding. Homebuilder stocks saw strong returns from the spring to fall last year due to the flight to the suburbs and low mortgage rates. While these stocks saw recent weakness due to concerns over rising rates, the Fed's commitment to near-zero rates has removed that obstacle, in my mind. That's why I am recommending homebuilding stocks such as D.R. Horton, Inc. (DHI), KB Home (KBH), PulteGroup, Inc. (PHM).

But before I get into evaluating those stocks, let's take a look at the markets over the past week.

Market Commentary

Stocks rose Tuesday after investors came back from the long holiday weekend optimistic about support for a large stimulus bill. Adding to the mix was Janet Yellen's nomination for Treasury Secretary. She testified in her confirmation hearing that she favors significant fiscal action to help support the economy. All three major indexes finished the day higher.

All three indexes reached record intraday and closing highs on Wednesday, as investors looked ahead to the President-elect's plans to stimulate the economy. The S&P 500 and Nasdaq both finished Thursday at record closing levels, with the Dow Jones Industrial Average just coming up short. A future stimulus plan was again on investor minds. Stocks finished lower today due to more concerns over the pandemic and whether a substantial stimulus plan would pass through Congress.

Market Outlook

While the market is looking ahead to a stronger economic recovery, one industry that is already performing well, and should continue to, is housing. As I mentioned earlier, homebuilding stocks were on a tear from March 23rd to October 15th. The iShares U.S. Home Construction ETF (ITB) gained 149.7% during that time. In the second half of October, shares plunged as rates started to increase. Since then, homebuilding stocks saw mixed returns until two weeks ago, when they returned to their ascent.

Once Fed Chair Jerome Powell indicated that he planned to keep rates near zero for the foreseeable future, the original growth story of low rates and historically strong demand came back into play. Janet Yellen's indication that she also favors keeping rates low is further confirmation. We got news yesterday that U.S. home construction starts rose the highest in December since 2006, as homebuilders have been responding to the massive demand for single-family housing.

Residential starts climbed by 5.8% to a 1.67 million annualized rate. The demand has also been driven by the need for working and schooling at home. According to NerdWallet, mortgage rates have been trending down over the past couple of weeks. The 30-year fixed mortgage rate has dropped from 3.047% on January 12th to 2.908% today. The 15-year rate has fallen from 2.665% on January 10th to 2.420% today. That's why I am highlighting three homebuilding stocks that I am bullish on.

D.R. Horton, Inc. (DHI)

DHI is a leading homebuilder in the United States with operations in 90 markets across 29 states. The company mainly builds single-family detached homes and offers homes to entry-level, move-up, luxury buyers, and active adults. DHI has been benefiting from a booming housing market and the Fed's near-zero interest rate policy.

The company is also the most diversified housebuilder in the country, so investors don't need to be concerned with geographic housing risks. I believe that the strong housing market will continue, and DHI should benefit from its focus on affordable, entry-level homes. This is due to changing consumer preferences as millennials are leaving cities behind for homes in the suburbs. The company is also seeing higher earnings estimates for the fiscal years 2021 and 2022.

The stock is rated a "Buy" in our POWR Ratings system. It holds a grade of "A" in Buy & Hold Grade and a "B" in Trade Grade. Those are two of the four components that make up the POWR Ratings. DHI is also the #12 ranked stock in the Homebuilders industry.

KB Home (KBH)

KBH is an American construction company that focuses on the residential construction of single-family homes. The company operates in several markets and focuses on first-time and move-up homebuyers. It follows a built-to-order model that offers personalized homes at attainable prices based on market location.

The company ended last year on a strong note. KBH's net orders grew 42% for the fiscal fourth quarter, which was the highest fourth-quarter level since 2005. Its backlog at fiscal fourth quarter-end was 7,810 homes, up 54% from a year ago. A healthy backlog level and a strong lineup of community openings should help the company generate up to $6 billion in housing revenue this year.

The stock is rated a "Strong Buy" in our POWR Ratings system. It holds a grade of "A" for Trade Grade and Buy & Hold Grade, and a "B" for Peer Grade. It is also the #5 ranked stock in the Homebuilders industry.

PulteGroup, Inc. (PHM)

PHM is one of the largest homebuilders in the United States, operating in 44 markets across 24 states. The company's focus on entry-level homes has served it well. There has been a growing demand for lower-priced homes due to affordability concerns in the U.S. housing market. First-time buyers represented 30% of PHM's closings in the third quarter, which was an increase from the same quarter last year. In addition, first-time orders increased 39% year over year for the quarter.

The company's land acquisition strategies have helped drive growth as well. Last year, the company expanded off-site manufacturing in Florida with the acquisition of Innovative Construction Group. Innovative Construction Group is a provider of off-site solutions focused on single-family and multi-family wood-framed construction.

The stock is rated a "Buy" in our POWR Ratings system. It holds a grade of "A" in Buy & Hold Grade and a "B" in Trade Grade. It is also the #15 ranked stock in the Homebuilders industry.

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DHI shares were unchanged in after-hours trading Friday. Year-to-date, DHI has gained 12.75%, versus a 2.41% rise in the benchmark S&P 500 index during the same period.

David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a Consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.

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