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Building Confidence In Q2 Earnings: 4 Housing Stocks

The Q2 earnings season is gathering steam with 15.4% of the construction companies having already released their numbers. And they’re unblemished with earnings as well as a revenue beat ratio of 100%. Major homebuilders such as KB Home (KBH - Free Report) , Lennar Corp. (LEN - Free Report) and Toll Brothers Inc. (TOL - Free Report) have outperformed the Zacks Consensus Estimate by 26.92%, 16.67% and 17.74%, respectively.

The case for investing in homebuilding stocks looks good in the light of the above arguments. So, it is a profitable strategy to zero in on a handful of homebuilders that are poised to beat earnings estimates this quarter. An earnings beat should help these stocks gain investor confidence, paving the way for strong price appreciation.

Investor sentiment is quite high at the start of the second-quarter reporting cycle given the solid earnings outlook and favorable homebuilding/housing industry fundamentals. The S&P Homebuilders Select Industry Index has returned 14.6% year to date. The Zacks categorized Building-Residential/Commercial industry has gained almost 30% so far this year, faring a lot better than the broader market (S&P 500) that has returned 9.3%.

The housing market stands tall courtesy of continued strong job growth. The 2017 outlook for homebuilding is quite compelling, given historically low mortgage rates, healthy demand, consistent job growth and solid homebuilders’ confidence. Although homebuilders’ confidence dipped slightly in June, it’s still above 50, which is encouraging. Moreover, mortgage rates are near historic lows even after the Fed’s recent interest rate hike. Through May 2017, the U.S. economy added jobs for the 80th straight month. The unemployment rate was 4.3% in May, the lowest since 2001.

Solid Earnings Outlook

Overall, homebuilding companies seem to be on solid ground. Notably, homebuilding companies are broadly grouped in the Construction sector (one of the 16 Zacks sectors).Per the Zacks latest Earnings Trends report, the construction sector’s earnings are expected to increase 15.7% in Q2 compared with 9% in the earlier quarter. Revenues are also expected to improve 8.4% (6.8% growth in Q1). For 2017, earnings will probably rise 18.3% (against 7.6% in 2016) on 10.1% revenue growth (6.9% a year ago).

Higher Demand Defying Weaknesses

According to recently released existing home sales data by the National Association of Realtors, existing home sales increased 1.1% to a seasonally adjusted rate...