Los Angeles wildfires continue to wreak havoc in the region, taking precious lives and destroying thousands of homes. The LA County Sheriff announced that nearly 10,000 structures were lost in the wildfires, but this number has already gone up and is expected to rise further as the authorities struggle to contain the fires.
Once the dust settles, there will be a huge demand for reconstruction of properties destroyed in the wildfires. The Biden administration has already promised federal reimbursements for the recovery efforts going on. Homebuilders could possibly benefit from this government support and the resulting spending surge as well.
To come up with the list of 7 stocks that could surge from LA wildfire recovery efforts, we considered stocks with a market cap of at least $4 billion.
7. The Allstate Corporation (NYSE:ALL)
ALL stock is down 5% since last Monday. The stock’s valuation continues to impress investors. Some would argue that the recent multiple expansion has priced in a lot of growth, but the re-rating is consistent with the rest of the market. The stock is trading at a forward EPS multiple of 7.7 compared to the S&P’s multiple of 22.
This attractive valuation is also better than that of some of its peers, including Travelers and Progressive Corp. The company recently survived activist investor Nelson Peltz, who gave up and sold 3.04 million shares, a sizable part of his total holding. While this would disappoint those who wanted a shakeup at the firm, investors would appreciate that the company can now get back to focusing on its affairs.
6. Toll Brothers (NYSE:TOL)
Toll Brothers is a luxury home builder in the United States, including Los Angeles, California. It was having an amazing 2024 when in late November the stock started tumbling after poor October home sales numbers. The stock is now available at a 25% discount.
This discount looks even more attractive when one considers the possibility of increasing revenue in 2025. As unfortunate as it is, a lot of luxury homes have been destroyed by the LA wildfires. Once the dust settles, these homes will need to be rebuilt and TOL operates exactly in the luxury homes segment.
But that’s not all. Even without the potential increase in demand in 2025, the company boasts strong enough finances to be considered a good investment. The company has a strong $1.3 billion cash position, no major debt to retire in 2025, and a $1.8 billion revolving credit facility. This is well complemented by over $1 billion in cash flows in 2024, setting the company up for potential land acquisitions to expand its business in 2025.
5. Lennar Corporation (NYSE:LEN)
Lennar Corporation stock’s sell-off has been more pronounced than its peers. The stock is down 32% since September and this poor performance is what sets it up nicely for a possible outperformance in 2025. Analysts at RBC Capital Markets believe the stock has already fallen so low that the risk-reward ratio aligns well with investors who want to buy the company’s stock.
LEN is planning to get rid of its land assets by spinning them off into a new REIT company. Investors will receive shares of this new company, increasing shareholder value through possible future dividends. Future expansions of this new REIT will also have no financial implications for LEN, helping it maintain its strong balance sheet.
The improving cost management as a result of this spin-off will also help resolve LEN’s inventory problems, helping it improve its return on equity. These short-term catalysts set up the company well for a 2025 outperformance.
4. KB Home (NYSE:KBH)
KB Home is one of those homebuilders that are poised to benefit from the industry-wide recovery expected in 2025. It is also the beneficiary of the housing under-supply, which has increased home prices, ultimately benefitting KBH. The company just confirmed this when it announced an earnings beat yesterday, causing the stock to soar after hours.
The firm’s revenues have grown at a CAGR of over 10% in the last 10 years. Its ROE has improved from 6.3% 8 years ago to 15.7% in 2023. However, investors should also note that the company’s gross margins are the second-lowest among its peers, so the improved ROE is still trailing most of its competitors. This will likely weigh on value realization in 2025, but the bull thesis still remains intact.
KB Home’s management is also actively buying back shares. Looking at it in the context of a monetary easing environment and a decrease in inflation, the housing market is set to make a comeback in 2025 and KB Home is ready to benefit from that.
3. PulteGroup (NYSE:PHM)
PHM operates by acquiring land and then building properties on that land, mainly for residential purposes. The company is expected to maintain strong margins through 2025 as confirmed by UBS Securities analysts just last week. The analysts upgraded the stock from Neutral to Buy based on the strength of its margins.
Analysts also believe that homebuilders like PHM have bottomed because the prevailing negativity is unlikely to continue. The lackluster demand and rising inventory should both improve in 2025, helping investors realize value in their investments.
Just last month, JPMorgan also echoed similar sentiments. The bank’s US equity analysts raised the price target on PHM to $153, a 42% upside from current levels. The increasing demand from the LA wildfire damage will likely help the stock go much further than that.
2. Essex Property Trust, Inc. (NYSE:ESS)
BMO Capital Markets upgraded Essex Property trust shares from market perform to outperform as analyst John Kim predicted that the company is ready to experience growth due to the ongoing fire in LA. As a result of the 0.7% loss in Los Angeles’s residential supply, the displaced residents will drive up demand for multifamily housing.
Essex’s balance sheet remains strong, despite increasing costs. Analysts predict 4-5% growth in operational income and estimate its fair value to be $320-$325. This is in addition to a strong history of dividend growth that supports the bull thesis. Regardless of fluctuations in stock prices, the stock remains a valuable choice for investors.
Due to its guarded geographical positioning, Essex has gained value by 13% in the past year. As California has few numbers of new apartments being built and an increase in demand for residential supply due to the LA wildfires, the company is expected to outperform in 2025. Keeping in mind that the company generates 80% business in California, it’s a worthy option to consider.
1. D.R. Horton Inc. (NYSE:DHI)
D.R. Horton focuses on providing affordable homes to its customers, a segment that has experienced impressive growth lately. As the LA wildfires continue to rage, affordable homes could become a focus for both the government and the public. Apart from this, the company also has a diversified portfolio, with operations ranging from rentals to its subsidiary Forestar.
The company’s 2025 estimates are interesting to look at. Despite a rise in the number of households that the company could sell this year, its revenue is expected to decline. This could be due to the company’s other business segments, or lower house prices. The increase in demand post-LA wildfire recovery could help the company plug this gap, allowing it to continue its growth path.
The stock’s downward trajectory since October is for good reason. Its earnings are declining and so is its revenue. However, at the considerable discount that the price now offers, the stock could bottom out soon. That’s when catalysts like the interest rates and improving housing prospects for 2025 could kickstart the next rally.
D.R. Horton is not on our latest list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 69 hedge fund portfolios held DHI at the end of the third quarter which was 62 in the previous quarter. While we acknowledge the potential of DHI as a leading investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as DHI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. This article was originally published at Insider Monkey.