- These 3 undervalued housing stocks can deliver attractive returns as the housing market remains strong and is resilient to economic conditions
- Williams-Sonoma (WSM): Strong sales growth and positive free cash flow trend are bullish
- Lennar (LEN): The stock price correction offers an investment opportunity hard to pass
- Toll Brothers (TOL): Strong Q1 earnings report beating on EPS and revenue
The U.S. housing market is all about headlines that are mixed, some say it is subject to a correction, and some say it is resilient, and the latter is my opinion too. Real estate is a huge market with lots of risks but when it comes to finding undervalued housing stocks to invest in, the statistics and trends of important data are the first sources to rely on.
What are the general conditions now in the U.S. housing market? The mortgage rates have increased and are likely to increase further as the Federal Reserve is determined to raise the prime interest rate 50 basis points several times until inflation is put under control and starts declining from historical highs over the past 40 years.
The FHFA (Federal Housing Finance Agency) House Price Index that is tracking the changes in single-family houses is very strong and keeps advancing as of April 2021.
The index reached 381.40 points in February from 373.70 points in January 2022. This was the highest figure in the past year. The Federal Reserve is monitoring the housing market as rents contribute to the inflation rate.
What is also very bullish to consider is the fact that “Record low inventory over the past couple of years also means there is plenty of pent-up demand,” and high demand can drive home prices higher.
These 3 undervalued housing stocks after a weak start in 2022 present an opportunity to rebound, and they all have a dividend yield that is suitable for long-term investors for generating passive income.
Undervalued Housing Stocks to Buy: Williams-Sonoma (WSM)
Williams-Sonoma (NYSE:WSM), a retail company selling home products that has a brand portfolio consisting of Pottery Barn, West Elm, and Williams Sonoma, is the first undervalued housing stock for this article. It has a P/E ratio of 8.53 and a dividend yield of 2.46% and its shares have losses of nearly 26% year-to-date.
Williams-Sonoma is a stock to like for its strong sales growth and profitability and consistent positive free cash flow. Compared to the Consumer Discretionary sector median values, the company now trades at a considerable discount as in terms of its P/E GAAP (TTM), price/cash flow (TTM), and EV/EBIT (TTM) it has differences of -30.98%, -35.53% and -47.84% respectively.
The firm has shown a consistent EPS (Diluted) growth of 10.90%, 91.59%, and 71.32% for its fiscal years 2020, 2021, and 2022 respectively, and is generating consistent and strong positive free cash flows. In its latest quarter earnings, Williams-Sonoma reported EPS GAAP of $5.41, a beat by $0.60, and revenue of $2.50 billion, a miss by -$76.93 million.
Lennar (LEN)
Lennar (NYSE:LEN) is a homebuilder having several segments like Homebuilding East, Homebuilding Central, Homebuilding Texas, Homebuilding West, and Financial Services. Its shares are down nearly 38% year-to-date presenting now a very attractive investment opportunity as they are trading at a PE Ratio (TTM) of 5.63 and have a forward dividend & yield of 1.50 and 1.89% respectively.
The price/sales (TTM) is 0.85 which is very cheap, and the sales growth is solid in 2021 when the firm reported an increase of 20.82% in its revenue to $27.14 billion. Undervalued stocks have more chances of performing better by having solid fundamentals.
The LEN stock has increased its EPS (diluted) consistently over the past five years reporting in 2021 a figure of $14.27, an increase of 81.83% compared to the EPS (diluted) of $7.85 in 2020. The firm generates strong and consistent free cash flow and has a 1-year target on Yahoo! Finance of $114.69.
Undervalued Housing Stocks to Buy: Toll Brothers (TOL)
Toll Brothers, Inc. (NYSE:TOL), a homebuilder that operates through its Traditional Home Building and City Living segments has witnessed its shares declining nearly 33% year-to-date.
Having a PE Ratio (TTM) of 6.18 and a forward dividend & yield of $0.71 and 1.81% respectively, the TOL stock offers a lot of upside potential as the 1-year target on Yahoo! Finance is $64.92 — representing a potential return of approximately 33% from its current price of $48.75.
The price/sales (TTM) of 0.66 and the PEG Ratio (5 yr expected) of 0.39 support the fact of being an undervalued stock. Its latest earnings report back in February was very strong as the company reported a beat on both EPS and revenue. EPS GAAP of $1.24 was a beat by $0.09 and revenue of $1.79 billion was a beat by $4.92 million.
The sales growth increased 24.20% in 2021 to $8.79 billion and net income surged 86.65% to $833.63 million. Additionally, Toll Brothers generated a free cash flow of $1.24 billion in 2021 an increase of 37.58% vs 2020, which is very positive and supportive for the stock.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.