Lennar Corporation (LEN), Toll Brothers Inc (TOL): Are These Housing Plays Still Safe?

Back in January, green shoots in the housing market were just starting to show. Home prices had risen 7.4% during 2012 – the most since 2005. Off the back of this data I picked Lennar Corporation (NYSE:LEN), Toll Brothers Inc (NYSE:TOL) and USG Corporation (NYSE:USG) as three companies that were well placed to ride a housing recovery.

Since then, the housing market has really taken off, existing home sales have jumped, and the median home price has risen 15.4% from a year ago. Furthermore, inventories are running low with an estimated 5.1 months worth of supply left at the May sales pace – 6 months of supply is considered a healthy balance between supply and demand.

Nearly seven months on and the market has hit new all-times highs followed by extreme volatility and 300+ point moves to the downside. Despite all this, how has the portfolio got on and is there still time to buy?

Performance

Unfortunately, the portfolio has not performed well. Overall, an equally weighted portfolio of the three stocks would be down 10.7%, compared to the S&P 500, which is up 10.4%.

So, what went wrong?

Since the Fed statement on June 19 the market has been selling off, concerned that rising rates in the mortgage market will slam the breaks on the housing market recovery.

Indeed, as shown in this table, over a year-long time frame, all of the companies have actually significantly outperformed the S&P 500 index.

Is it still safe to buy?

Well as I write this, news has just come out reporting that prices for US homes leaped in April, posting the fastest year-over-year growth in seven years. Prices expanded in 19 out of 20 cities. Prices rose on average 12.1%, with prices in San Francisco exploding 23.9%. The market was apparently supported by low levels of inventory as mentioned above and record low interest rates.

In addition, Lennar Corporation (NYSE:LEN) has just reported second-quarter earnings, which show that the company’s sales grew by double digits and home deliveries expanded 39%. Unfortunately, the company reported a lower profit than the same period last year, however, this was mostly down to a one-off tax gain in 2012.

Elsewhere, last month, Toll Brothers Inc (NYSE:TOL) reported a fiscal second-quarter profit that was 46% higher than the same period last year. The company also reported revenue growth of 22%.

Thanks to rising home sales and rising home prices, both Toll and Lennar Corporation (NYSE:LEN) have seen their earnings estimates raised by analysts over the past few months. Toll Brothers Inc (NYSE:TOL) is now expected to earn $0.83 per share for 2013, up from $0.70 predicted at the beginning of the year. The company is also expected to double earnings to earn $1.50 per share during 2014.

Meanwhile, Lennar Corporation (NYSE:LEN) has had its sales predictions for 2013 increased from $5.4 billion at the beginning of the year to $5.9 billion currently, a 9.3% gain.

So, it would appear that the housing market is still strong and both Lennar and Toll Brothers Inc (NYSE:TOL) are set for growth. Additionally, the companies are now cheaper with a better outlook than my original call so it would appear that there is a good opportunity to invest.

What about USG?

Building materials company USG Corporation (NYSE:USG) may not have recovered as fast as the home builders, but the company’s recovery is forecast to gather strength over the rest of the year. Currently, analysts predict that the company will earn $0.18 for the quarter ending June 2013 and $0.25 for the quarter ending September 2013. Overall, the consensus estimate is for the company to earn $0.55 for the full-year 2013 and $1.68 for 2014 — both of which are impressive rates of growth. With these impressive rates of growth, USG looks cheap and trades at a forward P/E ratio of 13 compared to its 10 largest peers, which trade at an average P/E ratio of 22.

Conclusion

Overall, the home builders have rapidly returned to health during the last few months but their performance has been dented during the last few weeks. This could present a perfect opportunity to buy as the housing market remains strong and revenue continues to grow.

So, despite poor performance so far this year, it could be time to get back into these three companies to play the housing recovery.

Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article Are These 3 Housing Plays Still Safe? originally appeared on Fool.com and is written by Rupert Hargreaves.

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