Investors could find a home in housing stocks.
The U.S. economy is still limping along, but the housing market is red-hot. Historically low interest rates, coupled with Americans being stuck at home, has led to a surge in homebuying and home improvement projects, according to Bank of America. Strong housing demand and short market supply triggered a 5.5% rise in U.S. home prices in July, the biggest annual gain in two years. For investors looking to profit from the housing boom, here are eight of Bank of America’s top housing and real estate stocks to buy.
Home Depot (ticker: HD)
Home Depot’s record-breaking second-quarter earnings report showed revenue up 23.4% year over year to a new high of $38.05 billion as more Americans took on do-it-yourself projects during a socially distanced summer. Analyst Elizabeth Suzuki says investors should anticipate a drop in home improvement spending in the third quarter in part because of declining government stimulus and unemployment benefits. However, she is bullish on longer-term home improvement trends, including more Americans working from home and millennials becoming homeowners. Bank of America has a “buy” rating and $330 price target for HD stock.
Lowe’s Cos. (LOW)
As good as Home Depot’s second quarter was, Suzuki says Lowe’s is her preferred pick and has a chance to outperform its largest competitor in coming quarters. Lowe’s second-quarter same-store sales growth was a record 34.2%, and an operating margin of 14.5% was also an all-time high. Suzuki says Lowe’s is a “must-own stock,” and its operating margin and market share expansion opportunities are still in the early innings. Investors should also appreciate Lowe’s omnichannel retail opportunities, given that online sales jumped 135% last quarter. Bank of America has a “buy” rating and $200 price target for LOW stock.
D.R. Horton (DHI)
D.R. Horton is the largest U.S. public homebuilder. Analyst John Lovallo says D.R. Horton is also the best-in-class long-term investment within the homebuilder group. Second-quarter order growth of 38% was more than double Lovallo’s estimate, and a homebuilding gross margin of 21.6% also beat expectations. In addition to DHI’s size and scale advantages, Lovallo says D.R. Horton has demonstrated consistent execution, and its focus on entry-level housing and first-time homebuyers should serve the company well as millennials flood the housing market for the first time. Bank of America has a “buy” rating and $83 price target for DHI stock.
Alexandria Real Estate Equities (ARE)
Lovallo says trends in the housing market will also significantly affect commercial real estate. Alexandria Real Estate Equities is a real estate investment trust, or REIT, that owns and operates office and laboratory space leased primarily to companies in the biotechnology, pharmaceutical and other fields. A permanent shift to remote work could be devastating to many commercial real estate REITs, so Lovallo says real estate investors should stick to REITs like Alexandria that have maintained high usage levels throughout the health crisis. Bank of America has a “buy” rating and $204 price target for ARE stock.
Tractor Supply Co. (TSCO)
Tractor Supply is the largest U.S. farm and ranch retail store operator. It isn’t the type of home improvement pure play that Lowe’s and Home Depot are, but Suzuki says Tractor Supply will also benefit from Americans moving from cities to suburban and rural areas and working from home. Suzuki says Tractor Supply has gotten a boost from customers stocking up on essentials such as pet food and livestock feed. A rise in hobbies like gardening and raising poultry has also been a tailwind. Bank of America has a “buy” rating and $171 price target for TSCO stock.
Invitation Homes (INVH)
Invitation Homes is an REIT that owns and operates a portfolio of more than 79,000 single-family U.S. rental properties. While apartment REITs have struggled in 2020, analyst Jeffrey Spector says Invitation’s occupancy rate hit 97.8% in the second quarter, a second consecutive quarterly record high. Renewals were up 3.5% and new leases were up 2.7%. Spector says favorable demographic trends, falling churn, limited housing supply and rising housing prices are positive trends for Invitation. Bank of America has a “buy” rating and $35 price target for INVH stock.
American Homes 4 Rent (AMH)
Like Invitation Homes, American Homes 4 Rent is a single-family residential REIT that owns more than 53,000 U.S. properties. Spector says American Homes 4 Rent increased its occupancy rate to 95.6% in the second quarter and 96.4% in July. Unfortunately, revenue growth was flat last quarter and expenses increased, but Spector says he remains bullish on the REIT in the long term because of favorable demographic tailwinds, margin expansion opportunities, a healthy balance sheet and potential for external growth. Bank of America has a “buy” rating and $33 price target for AMH stock.
Floor & Decor Holdings (FND)
Floor & Decor is a specialty retailer focused primarily on hard surface flooring. Floor & Decor shares are up about 40% year to date and trade at nearly 50 times forward earnings estimates, but Suzuki says premium valuation is warranted because the company’s growth rate outclasses its peer group. Last quarter, Floor & Decor reported an 11.1% drop in revenue. However, in the next two years, Suzuki is projecting that annual earnings growth will average nearly 40% unless the U.S. housing market significantly weakens. Bank of America has a “buy” rating and $77 price target for FND stock.
Housing stocks to buy:
— Home Depot (HD)
— Lowe’s Cos. (LOW)
— D.R. Horton (DHI)
— Alexandria Real Estate Equities (ARE)
— Tractor Supply Co. (TSCO)
— Invitation Homes (INVH)
— American Homes 4 Rent (AMH)
— Floor & Decor Holdings (FND)
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