Housing starts increased to a five-month high in July, signaling that growth in the sector remains healthy. Additionally, this was the second highest pace recorded since the end of 2008’s recession. Multiple factors, such as strength in the labor market and low interest rates are continuing to fuel a housing recovery.

Additionally, homebuilders' confidence has increased this month, which indicates that this trend is likely to continue. At this point, it makes good sense to pick stocks benefiting from the substantial pickup in housing sector growth.

Housing Starts Surge

Housing starts rose 2.1% in July to a seasonally adjusted annual rate of 1,211,000, beating the consensus estimate of 1,175,000. However, building permits slipped marginally by 0.1% to a seasonally adjusted annual rate of 1,152,000 last month.

The increase in housing starts was in line with the trend witnessed in June. Housing starts had increased 4.8% to a seasonally adjusted rate of 1.189 million in June. Building permits too rose 1.5% to 1.153 million.

The increase in housing starts was the second highest reading since the end of the recession. Only in February and June 2015 was an even higher increase of 1.213 million recorded. Delving into the details, single family starts inched up 0.5% to an annual rate of 770,000. However, July’s strength was mostly attributable to a 8.3% increase in multifamily starts which recorded an annual pace of 433,000.

Homebuilders’ Confidence Improves

Additionally, builders’ morale improved this month, holding out the hope for more construction activity in the days ahead. The NAHB/Wells Fargo Housing Market Index increased 2 points to 60 in August from a downwardly revised 58 in July. This was in line with the second highest reading for the year.  

Meanwhile, current sales conditions rose 2 points to 65, while the index of expected conditions increased 1 point to 67. These are gauges of builders’ outlook about the present market and the forthcoming six months, respectively.

Our Choices

The increase in housing construction during the month of July has been significantly more than gains made in June. Additionally, builders' confidence remains significantly high, indicating that the sector is likely to perform favorably in the near future.

Adding stocks likely to gain from the housing sector’s strength to your portfolio makes for a wise move at this point. However, picking winning stocks may prove to be difficult.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.

Universal Forest Products Inc. (UFPI - Analyst Report) manufactures, treats, distributes and installs lumber, composite wood, plastic and other building products.

Universal Forest Products has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. The company has expected earnings growth of 25.6% for the current year. Its earnings estimate for the current year has improved by 10.7% over the last 30 days.

MDC Holdings Inc. (MDC - Snapshot Report) is engaged in the construction, sale and related financing of residential housing and the acquisition and development of land for use in its homebuilding activities and sale to others.

MDC Holdings has a Zacks Rank #1 and a VGM Score of B. The company has expected earnings growth of 52.5% for the current year. Its earnings estimate for the current year has improved by 6.9% over the last 30 days.

Louisiana-Pacific Corp. (LPX - Snapshot Report) manufactures building materials and engineered wood products in the U.S., Canada, Chile and Brazil.

Louisiana-Pacific has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of more than 100% for the current year. Its earnings estimate for the current year has improved by 13.7% over the last 30 days.

Boise Cascade Company (BCC - Snapshot Report) operates as a wood products manufacturer and building materials distributor.

Boise Cascade has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth 5.3% for the current year. Its earnings estimate for the current year has improved by 27.3% over the last 30 days.

KB Home (KBH - Analyst Report) constructs and sells a variety of new homes for first-time, move-up and active adult homebuyers, including attached and detached single-family residential homes, townhomes and condominiums.

KB Home has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 61.9% for the current year. Its earnings estimate for the current year has improved by 0.4% over the last 30 days.