Hedge Funds Have Built A Place in Their Portfolios for These Homebuilders

The homebuilding industry might be facing rough weather of late, but has performed remarkably well over the past five years. During that period, the S&P Home builders Select Industry Index has registered gains of almost 92%, topping the S&P 500’s returns of 66% during the same period. Several analysts and investors like Morris Mark, founder of Mark Asset Management, believe that this outperformance can continue over the next few years. While speaking at the recently concluded SALT Conference in Las Vegas, Mr. Mark said that low interest rates and increasing employment are improving the situation in the housing market. He also believes that regardless of who wins the presidential race this year, the new administration will work towards easing the regulations on residential housing financing, which have been under intense scrutiny since the end of the financial crisis. Considering the optimistic outlook that investors have towards the industry, in this article we’ll run through the five most popular homebuilder stocks among the hedge funds in our system as of March 31.

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 more details here).

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#5 PulteGroup, Inc. (NYSE:PHM)

 – Investors with long positions (as of March 31): 29

 – Aggregate value of investors’ holdings (as of March 31): $452.44 million

Let’s begin with PulteGroup, Inc. (NYSE:PHM), which was in the portfolios of 29 of the hedge funds in our database on March 31, up by five quarter-over-quarter, while the aggregate value of their holdings in the stock rose by $39.4 million. PulteGroup, Inc. (NYSE:PHM)’s stock has largely been range-bound over the past three years, but investors have at least enjoyed the fruits of larger dividend payments, as shares currently sport an annual dividend yield of almost 2%, up from 1.16% in August of 2013. On April 25, analysts at Raymond Jones downgraded the stock to ‘Market Perform’ from ‘Outperform’, while keeping their price target on it unchanged at $19. A fund that increased its stake in PulteGroup during the first quarter was David L Briggs‘ Dulcet Capital, which upped its holding by 63% to 2.2 million shares.

#4 CalAtlantic Group Inc (NYSE:CAA)

 – Investors with long positions (as of March 31): 32

 – Aggregate value of investors’ holdings (as of March 31): $734.70 million

CalAtlantic Group Inc (NYSE:CAA)’s stock has gone nowhere in the last eight months, since Standard Pacific Corp. completed its merger with The Ryland Group, Inc. and created this new entity in October, 2015. During the first quarter, the number of hedge funds in our system long CalAtlantic Group Inc (NYSE:CAA) rose by three and the aggregate value of their holdings in the company swelled by $58.1 million. At the end of that period, the funds that we track owned over 18% of the company’s float in aggregate. On May 6, CalAtlantic Group Inc (NYSE:CAA) reported its first quarter results, declaring EPS of $0.15 on revenue of $694.10 million, which were largely in-line with analysts’ expectations of EPS of $0.14 on revenue of $694.92 million.

We’ll check out the three most popular homebuilders on the next page.

#3 Toll Brothers Inc (NYSE:TOL)

 – Investors with long positions (as of March 31): 34

 – Aggregate value of investors’ holdings (as of March 31): $446.75 million

Moving on, several hedge funds used the 11.38% decline in Toll Brothers Inc (NYSE:TOL)’s stock during the first quarter to initiate a stake in the company. Edgar Wachenheim‘s Greenhaven Associates was one of the hedge funds initiating a stake in Toll Brothers Inc (NYSE:TOL) during the quarter, purchasing 1.66 million shares of the company. However, while the number of shareholders of the company in our system increased by four during the quarter, the aggregate value of their holdings fell by $52.3 million. On May 24, the Toll Brothers reported its fiscal year 2016 second quarter numbers, which were much better than what analysts had projected. While the Street was expecting Toll Brothers to report EPS of $0.46 on revenue of $1.04 billion, the company announced EPS of $0.51 on revenue of $1.12 billion. Following the earnings release, analysts at Deutsche Bank reiterated their ‘Buy’ rating and $41 price target on the stock on May 25.

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

 – Investors with long positions (as of March 31): 38

 – Aggregate value of investors’ holdings (as of March 31): $1.09 billion

The largest homebuilding company in the country suffered a drop in its popularity among hedge funds during the first quarter. During that time, the number of hedge funds with long positions in D.R. Horton, Inc. (NYSE:DHI) declined by four, while the aggregate value of their D.R. Horton holdings shrank by $218 million. Nevertheless, there were also a few hedge funds that increased their stake in the company significantly during the first quarter, including Cliff Asness‘ AQR Capital Management, which boosted its stake by 114% to 6.45 million shares. Shares of D.R. Horton, Inc. (NYSE:DHI) have rebounded from a terrible start to the year, making up most of those losses over the past four months. Citing the company’s strong financials and the positive outlook for housing prices, most analysts are currently bullish on the stock, including analysts at RBC Capital, who reiterated their ‘Outperform’ rating on the stock on April 25, while increasing their price target on it to $36 from $35.

#1 Lennar Corporation (NYSE:LEN)

 – Investors with long positions (as of March 31): 43

 – Aggregate value of investors’ holdings (as of March 31): $1.18 billion

Though the number of shareholders of Lennar Corporation (NYSE:LEN) among the funds that we track inched down by one during the first quarter, the aggregate value of their holdings in it increased by 13.24%. Lennar Corporation (NYSE:LEN)’s stock ended the first quarter on a flat note, but has been drifting lower in the second quarter and currently trades down by over 7% year-to-date. According to analysts, the stock can perform well going forward if the company manages its debt burden well. The stock currently sports an average rating of ‘Overweight’ and an average price target of $54.60 from the 18 prominent analysts and research firms who cover it. Ross Margolies’ Stelliam Investment Management upped its stake in Lennar Corporation (NYSE:LEN) by 16% to 2.04 million shares during the first quarter.

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