Lennar Corporation (LEN), PulteGroup, Inc. (PHM): Four Reasons to Build Your Portfolio With This Stock

It’s rare when you come across a situation where a company is perfectly positioned to benefit from a turnaround in an industry. For the last few years, there has been a steady improvement in the housing market. Though there have been doubters along the way, many home builders have been reporting strong growth for multiple quarters. Even today, there are doubts as mortgage rates have risen and pundits are calling for more challenging days ahead. The good news for investors in the sector is, the choice of the best stock is simple, and there are four clear reasons to choose Lennar Corporation (NYSE:LEN).

The Doubters Are All Wrong
When looking at the housing market, you have to keep a long-term perspective. Short-term thinking led some to think that the housing market wouldn’t recover. Some even suggested that the American dream of buying a home was dead. Other analysts suggested that it would be many years before the housing market recovered.

The problem with all of these ideas is they assume that short-term issues will change long-term trends. While it’s true that the Great Recession put a damper on home buying, once house values corrected and interest rates dropped, it became more cost effective to buy than to rent. Once that line was crossed, buyers would have been crazy to stay on the sidelines.

When it comes to the current interest rate threat, short-term thinking suggests that the rise in mortgage rates from around 3.5% on a 30 year to about 4.5% will derail the housing recovery. This also is misguided as even at 4.5% interest rates are still near historic lows. Though house prices have begun to recover, there are still many homes that are valued significantly below their highs before the correction occurred. As long as interest rates stay relatively low, and house values are low, buyers should continue to enter the market. Many home builders will benefit from these positive trends, but in every industry there are winners and losers.

4 Times Better
Sometimes leadership in an industry is clear, and it appears that Lennar Corporation (NYSE:LEN) is the clear leader among home builders. While the company faces significant competition from companies like Toll Brothers Inc (NYSE:TOL), PulteGroup, Inc. (NYSE:PHM), and KB Home (NYSE:KBH), Lennar Corporation (NYSE:LEN) operates in a class of its own.

One reason Lennar Corporation (NYSE:LEN) looks like a long-term winner is the company’s high margins.

In fact, among their peers, Lennar Corporation (NYSE:LEN) led the way with an operating margin of 13.3%. By comparison, PulteGroup, Inc. (NYSE:PHM) finished in second, and managed an operating margin of just 7.49%. When you realize that KB Home (NYSE:KBH)’s and Toll Brothers Inc (NYSE:TOL)’ margins were just 4.69% and 1.81%, you can see just how dominant Lennar Corporation (NYSE:LEN)’s margin lead really is.

The second reason investors should consider Lennar is the company’s consistent increase in selling prices. Over the last couple of years, Lennar has been consistently reporting a rise in the average selling price of their homes. In the current quarter, Lennar continued this trend with an increase of 13%. The only company to report a greater increase in average selling price was KB Home (NYSE:KBH), with a 25% increase. Looking at PulteGroup, Inc. (NYSE:PHM)’s 10% increase and Toll Brothers Inc (NYSE:TOL)’ 3.6% increase, it seems clear that home builders of all stripes have pricing power.