The iShares U.S. Home Construction ETF (BATS:ITB) has experienced illustrious form this year, surging by more than 50%. However, an inflection point has emerged, suggesting it may be a good time to cash out on some of your housing stocks.
The inflection point I’m referring to is characterized by a few variables. Firstly, U.S. disinflation suggests a slowdown in consumer spending is embedded in the current economic environment. Even though I anticipate consumer sentiment to shift in 2024, real estate’s supply and demand factors take longer to adjust than most other sectors. Furthermore, building permits and new home starts still need to catch up to their cyclical averages. That suggests the year-to-date surge of housing stocks is questionable.
Although the home builder space is merely an enclave of the housing landscape, its performance represents the broader asset class’s health. Therefore, I dialed in on the arena to identify three housing stocks to sell. Let’s discuss each of them.
TopBuild (NYSE:BLD) made headlines at the turn of the month as the company’s CEO, Robert Buck, disposed of approximately $1.33 million-worth of BLD shares. Although the reason for Buck’s disposition may be unrelated to TopBuild’s prospects, market participants often price such events negatively. Therefore, I would not be surprised if technical short-sellers engage in due course.
The company released its third-quarter earnings in October, revealing promising year-over-year results. TopBuild’s adjusted sales increased by 1.9% year-over-year while its gross profit margin increased by 130 basis points to 31.7%.
However, as mentioned in the introduction, an inflection point has occurred within the housing space, reflected in TopBuild’s short-term results. A quarter-over-quarter vantage point shows the company’s volumes decreased. BLD’s installation volumes slumped by 3.5%, while specialty distribution slipped by 0.2%. In addition, specialty product pricing edged lower by 1.9%, suggesting broad-based product pricing slumps are en route.
Lastly, a market-based point of view suggests it is a good time to sell BLD stock. I say this because BLD stock’s price-to-earnings ratio of 16.75x seems a tad high. Moreover, the stock does not pay dividends, meaning there’s nothing to fall back on if capital appreciation is absent.
Installed Building Products (IBP)
Installed Building Products’ (NYSE:IBP) near 30% month-over-month surge places it in profit-taking territory as IBP stock’s put-call ratio has slipped down to 0.46x while its relative strength index has ticked up to 78.45. Both these metrics are countercyclical, implying that mean reversion is likely.
Although Installed Building Products’ third-quarter earnings beat estimates by 44 cents per share, a turning point has emerged. Sure, the IBP’s third-quarter revenue beat analysts’ estimates by $1.09 million. However, a 1.8% year-on-year decrease in the firm’s topline occurred due to waning end-market spending power. As such, one could argue that IBP is outperforming estimates but still succumbing to negative growth.
On a positive note, IBP operates an asset-light business model, allowing it to maintain a low capital expenditures (CapEx) structure, communicated by its CapEx-to-sales ratio of 2.09%. However, its asset-light model is supplemented by a growth-by-acquisition strategy to allow gains in market share. I believe the strategy is under interim threat as elevated interest rates paired with an uncertain economic environment may lead to lower acquisition volumes. As such, IBP stock could suffer from lower residual value growth in the coming years.
Despite its strong year-to-date run, I am uncomfortable owning IBP stock at a price-to-earnings ratio of 18.61x, especially considering the worrisome technical ratios I mentioned before.
D.R. Horton (DHI)
Jefferies (NYSE:JEF) analyst Collin Verron recently commented on DHI (NYSE:DHI) stock after assigning a Hold rating to it. According to Verron, D.R. Horton is experiencing pricing pressures. Moreover, Verron thinks incentives offered by DHI and some of its peers are worrisome due to the soft economic environment.
I concur with Verron’s outlook. Despite D.R. Horton’s strong topline performance, which saw it beat its fourth-quarter revenue target by $479.5 million, numerous fault lines are emerging. For example, DHI’s return on equity slipped to 13.2%, its lowest level since 2020. Moreover, the company’s return on inventory of 29.7% is down by approximately 1.44x year-over-year. These numbers combined echo the falling real pricing power embedded in D.R. Horton’s product mix.
Furthermore, D.R. Horton has approximately $2.1 billion in senior notes to service by 2028. The weighted average cost of the notes is merely 2.17%. Yet, a fading economy could result in narrower profit margins, concurrently adding credit risk to the notes and exacerbating DHI stock’s equity risk premium. Thus, DHI stock’s debt load attaches risk to its stock, given the possibility of a homebuilder industry crunch.
DHI stock’s price-to-earnings ratio of 10.12x isn’t badly placed. However, DHI stock’s relative strength index of 83.89 is highly problematic as it suggests the stock is overbought during a time of weakening industry variables.
On the date of publication, Steve Booyens did not hold (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.