Two reliable housing stocks, DR Horton (DHI) and KB Home (KBH) seem to be righting their respective ships, observes Dr. Joe Duarte, growth stock expert and editor of In the Money Options.
DR Horton is the largest homebuilder in the U.S., and thus has the scale to continue to operate with less stress than its competitors. It has been paying down debt and expanding its market share, which remains a major portion of its business plan.
Meanwhile KB Home has developed into an excellent niche player which capitalizes on location, amenities, and catering to first time home buyers and empty nesters, the two largest home buyer groups.
Both companies are describing a market in which they have no shortage of buyers and in which they continue to buy properties and steadily deploy development plans.
But here’s the catch, neither of them has any real pricing power, which has resulted in the need to use promotions to close sales. So far, the strategy has worked as both companies have delivered very good earnings news of late, albeit with mixed revenues, while providing positive earnings guidance.
Furthermore we are experiencing a generational shift where the migration of Americans from high tax to low tax states. It seems that this is an intangible factor which may make the difference in the top and bottom lines of homebuilders as it continues.
Census data shows that Texas is the most popular destination for those leaving California. Most interesting is the fact that startups are starting to leave the Bay Area and that Fortune 500 companies, medical supply giant McKesson (MCK), Coremark Holdings (CORE) and now Charles Schwab (SCHW) have moved to the Dallas area joining JP Morgan Chase (JPM) whose massive relocation to Plano, Texas is ongoing.
My point is not political. It’s just a fact that if more people are moving to new areas housing availability will have to be increased in those locations.
This is evident in Dallas where apartment building remains robust and where new housing developments as well as tearing down of older homes in order to build new ones seems to be growing phenomenon. Thus, even if some areas of the country may face decreasing demand, which is actually not evident yet, others will clearly pick up the slack.
In other words, the demographics and the balance of supply and demand are on the sides of the homebuilders, all of which means that the potential negatives — interest rates and the general state of the economy — are outside their control and as long as those remain reasonable, the homebuilders are likely to keep on doing what seems to be fairly good business.
Accordingly, it may make sense to ease back into the housing sector while keeping a very close eye on the bond market and the employment picture.
