5 Homebuilders That Hedge Funds Love Amid Booming New-Home Sales

July was the best month for new-home sales in almost a decade. A robust labor market and low mortgage rates helped Americans return to late-2007 new-home purchase levels, with the seasonally-adjusted rate hitting 654,000 annual units. Along with soaring demand rose residential construction, which was was a positive for construction companies, which have added 215,000 jobs over the past year.

In this article, we’ll take a look into the favorite homebuilders of hedge funds going into the third quarter in order to find a few ways to capitalize on the booming U.S. housing market.

Through extensive research, we determined that imitating some of the picks of hedge funds and other institutional investors can help generate market-beating returns over the long run. The key is to focus on the small-cap picks of these investors, since they are usually less followed by the broader market and are less price-efficient. Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see the details here).

#5. PulteGroup, Inc. (NYSE:PHM)

– Number of Hedge Funds With Long Positions (as of June 30): 24

– Aggregate Value of Hedge Funds’ Holdings (as of June 30): $367.1 million

Let’s start with PulteGroup, Inc. (NYSE:PHM), which saw the number of hedge funds in our database long its stock tumble by more than 17% over the second quarter. Among the funds that remained bullish on the stock were ClearBridge LLC (formerly Legg Mason Capital Management), which disclosed ownership of 5.92 million shares of the homebuilder valued at $115 million as of June 30, and Edgar Wachenheim’s Greenhaven Associates, which after a 10% increase to its position over the second quarter, held 4.75 million shares of the company.

Shares of PulteGroup, Inc. (NYSE:PHM) have gained more than 20% year-to-date, and over 13% since the end of the second quarter. Yesterday, the company launched a new gated community at Spring Branch, aimed at young families and millennials. The complex will include 55 two-story homes, to be sold starting around $300,000. Last month, the company priced an upsized debt offering of $1 billion; 4.25% notes due 2021 were offered at 103.5% of the principal amount (with YTM of 3.419%), and the 2027 3.419% notes were sold at par, with YTM of 5%.

#4. NVR, Inc. (NYSE:NVR)

– Number of Hedge Funds With Long Positions (as of June 30): 25

– Aggregate Value of Hedge Funds’ Holdings (as of June 30): $692 million

Opposite was the case for NVR, Inc. (NYSE:NVR), as the number of hedge fund backers of the company rose by 8.6% to 25 over the second quarter. One of the new shareholders was Jeff Lignelli’s Incline Global Management, which acquired 16,362 shares over the April-to-June period. Robert Bishop’s Impala Asset Management, with 124,839 shares, or more than $222 million in stock on June 30 ranked as one of NVR’s top shareholders.

While shares of NVR, Inc. (NYSE:NVR) had a good start to the year, gaining more than 8.3% in the first quarter, they have tumbled by 2.8% since the beginning of the third quarter, part of a decline that started in late-July after the company posted disappointing second quarter results. While revenue of $1.39 billion was in-line with the Street’s consensus, EPS of $22.01 missed estimates by $3.99.

Hedge funds’ three favorite homebuilders are unveiled on the next page.

#3. Toll Brothers Inc (NYSE:TOL)

– Number of Hedge Funds With Long Positions (as of June 30): 28

– Aggregate Value of Hedge Funds’ Holdings (as of June 30): $315 million

Despite a 17.6% reduction in hedge fund backing over the second quarter, Toll Brothers Inc (NYSE:TOL) made it to the homebuilders’ podium, with 28 funds among those we track holding more than 7% of its stock in aggregate. Included in this group were Jim Simons’ Renaissance Technologies, which boosted its holding by 23% between April and June, to 651,400 shares, and Ray Dalio’s Bridgewater Associates, with 604,652 shares worth $16.2 million as of June 30.

Although shares of Toll Brothers Inc (NYSE:TOL) are down by more than 6.15% year-to-date, they have been on the rise for a while now, having recuperated 17.5% of their value since the end of the second quarter. Shares spiked by 8.8% on Tuesday after the company reported third quarter EPS of $0.61, in-line with the Street’s consensus, on revenue of $1.27 billion, $20 million ahead of expectations. However, it was not only the revenue beat, or the 23% year-over-year growth in sales that pushed the stock up, but the aforementioned new home sales report which was issued on the same day, sending several homebuilders stocks upwards.

#2. D.R. Horton, Inc. (NYSE:DHI)

– Number of Hedge Funds With Long Positions (as of June 30): 31

– Aggregate Value of Hedge Funds’ Holdings (as of June 30): $1.01 billion

D.R. Horton, Inc. (NYSE:DHI) is our runner up, with 31 funds in our database long its stock on June 30, though down from 38 on March 31. Noteworthy was the position held by Ken Heebner’s Capital Growth Management, which comprised 7.55 million shares. Another notable investor was Greenhaven Associates, which, on top of holding 6.66 million shares of the company, held stakes in PulteGroup, Toll Brothers, Lennar, and other homebuilding-related stocks like Lowe’s Companies, Inc. (NYSE:LOW).

Shares of D.R. Horton, Inc. (NYSE:DHI) have been steadily on the rise since their February lows, having gained more than 40% since then, and about 5.3% since the beginning of the third quarter. Earlier this week, The Street’s Bruce Kamich made the case that the stock has hit a ceiling, after the strong run from its late-2008 lows. Shares were down almost 1% on that day.

#1. Lennar Corporation (NYSE:LEN)

– Number of Hedge Funds With Long Positions (as of June 30): 40

– Aggregate Value of Hedge Funds’ Holdings (as of June 30): $1.19 billion

Finally, there’s Lennar Corporation (NYSE:LEN), which was owned by 40 hedge funds holding more than 12% of its float as of June 30. Among the large shareholders of the company’s Class A stock were John Khoury’s Long Pond Capital, with 2.09 million shares, and Ross Margolies’ Stelliam Investment Management, with 1.6 million shares.

The Street’s Bruce Kamich also argued that Lennar Corporation (NYSE:LEN) wouldn’t go much higher due to what he defines as a lack of “upside leadership.” For those long Lennar, he would recommend using a sell stop below $44 to exit any long stakes. On the other hand, analysts at Zacks argued that after having delivered strong results last year and a robust first-half of 2016, and amid a sturdy housing and macro backdrop, that “Lennar is poised for continued strong performance in the second half.” So far, shares of Lennar are up by 3% in the second-half of this year.

Disclosure: Javier Hasse holds no interest in any of the securities or entities mentioned in this article.