Unless you’re in the housing market right now, you may not have realized how quickly the industry is shifting. And while what I’m about to tell you might seem like I’m sounding an alarm, I’m doing just the opposite.
This is the perfect opportunity to buy the best housing stocks on the market, and I found a stone-cold winner…
You see, I’m in the process of moving from Chicago to Southwestern Florida.
Enough of Illinois’ taxes. Enough of the snow. Enough of eating deep-dish pizza in the winter and adding on more pounds from rib festivals in the summer.
But I’m not fleeing on a whim. I made a deal with my wife shortly after we got married. We’d do three years in Chicago, and then we could relocate closer to our families.
At least, that was the plan. Then we put our condo up for sale here…
Higher interest rates are starting to price out buyers. It’s looking more likely we’re going to have to ride out another Chicago winter and hope buying picks up in the spring.
Currently, there’s not a lot of supply, so I’m optimistic and being patient right now.
But unfortunately for me and my wife, homebuilders are sounding the alarms that trouble is brewing…
On Oct. 9, house-builder D.R. Horton Inc. (NYSE: DHI) issued a fiscal 2018 forecast, and the numbers were below Wall Street expectations.
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D.R. Horton said sales and orders are lower than expected thanks to rising interest rates, which have increased borrowing costs and limited access to capital for many would-be buyers.
An uptick in materials costs and higher labor costs have forced the company and many of its rivals to increase the price of homes at a time when they are less affordable.
That latter element grabbed my attention.
You see, the housing market might be slowing down, but that doesn’t mean housing stocks are too. Just the opposite. This is the perfect opportunity to bank a quick profit thanks as the market separates the wheat from the chaff.
Rising material costs, rising labor costs, and other negative factors have the potential to fuel consolidation in any industry as firms look to capture economies of scale.
That means companies that offer lower-priced homes could be acquisition targets to help home-builders offset losses from their higher-priced models.
Today, I’m looking for companies that specifically cater to the lower-priced end of the housing market, trade at rock-bottom prices, and/or can breakout in the months and years ahead.
And boy, did I find a winner…
How I Found the Top Housing Stock to Buy
With a VQScore of 4, this company is right in our “Buy Zone.”
Plus, it fits my credentials as both a buyout and a breakout candidate. This housing stock caters to markets desperately in need of low-cost construction to meet market demand.
That’s because a takeover target can offer shareholders a premium from current prices, but if it’s not sold, we also have a solid company where the share price can increase in value as investors get on board.
M/I Homes Inc. (NYSE: MHO) fits my criteria perfectly.
M/I Homes is an Ohio-based home-builder that specializes in the single-family market.
It has a robust geographical footprint with operations in Columbus and Cincinnati, Chicago, Minneapolis, and the Virginia and Maryland suburbs of Washington, D.C., just to name a few.
All of these markets are in need of affordable housing for first-time and middle-class buyers. That includes a wealth of under 35-year-old Americans who remain engulfed in student loan debt but still want to buy their first home.
M/I Homes have been one of the most active builders in Chicago, a city in desperate need of newer, affordable housing supply.
In April, it introduced a value-based home-buying process for families that included two communities in the southwest suburbs with homes ranging between $181,000 and $247,000.
These prices are more affordable in an environment where interest rates are rising.
The numbers are also quite attractive when I looked under the hood of what this company has cooking. It is trading at a price-to-tangible-book value of 1.01.
That figure is almost half of the industry average of 1.99 P/TBV, making it an attractive target for acquisition.
Also, it trades at a price-to-cash-flow of 9.89.
When we’re buying cash flow, we’re always looking for a number under 10 to justify the price.
A lot of people haven’t heard of this stock, but analysts are paying close attention…
JMP Securities expects the MHO stock price to climb to $39 per share. From the opening price on Oct. 11 of $23.10, that’s a potential profit of 68.83%.
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