Housing demand has grown significantly over the past year, aided by a low-interest-rate environment and a widespread desire for better and bigger living spaces. And because the hot housing market faces low inventory and rising prices, we think it could be beneficial to bet now on fundamentally sound homebuilding stocks Lennar (LEN), PulteGroup (PHM), and Skyline Champion (SKY). 

The housing market has remained red hot amid even the worst of the COVID-19 pandemic thanks to the near-zero interest-rate environment and a rising demand for bigger and better domiciles in suburban areas in response to requisite remote working, learning and entertainment. And because the work-from-home trend is expected to continue even in the post-pandemic world, given its benefits to employees and employers, the demand for new houses should not decline anytime soon.

The NAHB housing market index in the United States edged up one point to 83 in April 2021. Moreover, investors’ interest in the homebuilding stocks is evident in the SPDR S&P Homebuilders ETF’s (XHB) 27.2% gains over the past three months compared to the SPDR S&P 500 ETF Trust (SPY) 13.5% returns.

Given the powerful demand for houses, suppliers are challenged by low inventory. Millennial home ownership is also on the rise despite rising home prices. Amid this favorable backdrop, we think it is wise to bet on established homebuilding companies that are positioned to capitalize on the tailwinds. We believe Lennar Corporation (LEN - Get Rating), PulteGroup, Inc. (PHM - Get Rating), and Skyline Champion Corporation (SKY - Get Rating) are such companies and are best picks in this space now.

Lennar Corporation (LEN - Get Rating)

One of America’s leading homebuilders, LEN primarily operates under the Lennar brand.The company operates through the following segments:Homebuilding East, Homebuilding Central, Homebuilding Texas, Homebuilding West, Financial Services, Multifamily, and Lennar. It also offers residential mortgage financing, title insurance, and closing services for home buyers and others.

LEN’s $5.33 billion in net sales for its fiscal year 2021 first quarter, ended February 28, represents a 18.2% year-over-year rise. The company’s net income has increased 151.3% year-over-year to $1.00 billion. LEN’s EPS came was  $3.20, up 152% year-over-year.

For the current quarter, ending May 31, analysts expect LEN’ EPS to be $2.36, which represents a 43% year-over-year increase. LEN  also surpassed  consensus EPS estimates in each of the trailing four quarters. The company’s revenue is expected to increase 13% year-over-year to $25.41 billion in its fiscal year 2021.

In March, LEN unveiled  its Upward America Venture. The platform is expected to acquire single family homes for rent in high-growth markets across the United States. The  venture will be positioned to spend more than  $4 billion on new single-family homes and town homes acquired from LEN and potentially other homebuilders.

The stock has gained 97.3% over the past year and closed yesterday’s trading session at $105.04. Wall Street analysts expect the stock to hit $109.15 in the near term, which indicates a potential 3.9% upside.

It’s no surprise that LEN has an overall B rating, which equates to BUY our POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

The stock has a B grade for Sentiment and Momentum. Click here to see LEN’s rating for Value, Stability, Growth, and Quality as well.

LEN is ranked #4 of 25 stocks in the B-rated Homebuilders industry.

PulteGroup, Inc. (PHM - Get Rating)

Having delivered roughly 750,000 homes, PHM ranks as the nation’s 3rd largest homebuilding company, with operations across 23 states and 42 major markets. The company offers a range of home designs, including single-family detached, townhouses, condominiums and duplexes through its brands—Centex, Pulte Homes, and Del Webb, among others. It operates through two segments: Homebuilding and Financial Services.

For its fiscal year 2021 first quarter, ended March 31, 2021, PHM’s total revenues were $2.73 billion, up 18.9% year-over-year. The company’s net income came in at $304.11 million, which represents a 49.3% year-over-year increase. Its EPS increased 52% year-over-year to $1.14.

PHM’s  EPS for the quarter ending September 30 is expected to increase 42.2% year-over-year to $2.19. Also, PHM surpassed  consensus EPS estimates in each of the trailing four quarters. Its revenue is expected to be t $14.81 billion in fiscal 2021, which represents a 34.2% year-over-year rise.

On April 27, PHM’s Board of Directors approved a $1 billion increase to its share purchase authorization, which brings its total share repurchase authorization to $1.2 billion. This reflects the company’s commitment to create long-term value for its shareholders.

The stock has rallied 97.5% over the past year. It closed yesterday’s trading session at $59.81 after hitting its $60.08 all-time high. Of 16 Wall Street Analysts that have rated the stock four rated it a Strong Buy and five rated a Buy.

PHM’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to Buy in our POWR Ratings system. It has a B grade for Momentum and Quality. In addition to these ratings, one can see PHM’s rating for Stability, Growth, Sentiment, and Value here.

PHM is ranked #5 in the same industry.

Skyline Champion Corporation (SKY - Get Rating)

SKY is a factory-built housing company that operates through roughly 38 manufacturing facilities across the United States and Western Canada. The company offers manufactured and modular homes, park-models and modular buildings for the multi-family, hospitality, senior and workforce housing sectors. It operates under the well-known brand names Skyline Homes, Athens Park Model RVs, Dutch Housing, Shore Park, and Silvercrest.

SKY’s $377.60 million in revenue for its fiscal year 2021 third quarter, ended December 26, represented a 10.3% increase year-over-year. While its gross profit increased 4.2% year-over-year to $71.80 million, its operating income increased 16.2% year-over-year to $27.50 million. The company’s net income has increased 26.8% year-over-year to $21.60 million. Also, its EPS came in at $0.38, up 26.7% year-over-year.

Analysts expect SKY’s EPS and revenue to increase 171.4% and 27.6% year-over-year, respectively, for the quarter ended March 31, 2021. Moreover, SKY surpassed the consensus EPS estimates in three of the trailing four quarters.

Last month, Champion Home Builders, a subsidiary of SKY, acquired ScotBilt Homes, LLC from SHI Group Holdings. ScotBilt’s strong presence in the Mid-South region complements SKY’s existing footprint. So, the acquisition is expected to generate solid returns in the coming quarters.

The stock has rallied nearly 118.9% over the past year to close yesterday’s trading session at $45.62. Wall Street Analysts expect the stock to hit $48.17 in the near term, which indicates a potential 5.6% upside.

SKY’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our proprietary rating system. It has a B grade for Momentum, Growth, Sentiment, and Quality also. Click here to see the additional POWR Ratings for SKY (Value and Stability).

SKY is ranked #6 in the Homebuilders industry. 

LEN shares were trading at $103.71 per share on Friday afternoon, down $1.33 (-1.27%). Year-to-date, LEN has gained 36.78%, versus a 12.10% rise in the benchmark S&P 500 index during the same period.