Meritage Homes Corp (MTH), Toll Brothers Inc (TOL): With Rates on the Rise, Is It Time To Flip Housing Stocks?

PulteGroup, Inc. (NYSE:PHM) and Meritage Homes Corp (NYSE:MTH) also carry much more reasonable debt loads than KB Home (NYSE:KBH), so they may be worth exploring a little further:

KBH Forward PE Ratio data by YCharts

I’m a fan of the forward PE ratio when looking at businesses that are (or should) be generating profits. While sometimes a company may be an anomaly, this is a good metric to compare a company to both its peers, and to its own past. With that context, we are more likely to glean useful information. To me, it’s pretty clear that Mister Market is expecting KB Home to keep delivering, and I’m not convinced that it will live up to these very high expectations.

Toll Brothers Inc (NYSE:TOL) is also carrying a high forward PE, but it’s a strong performer in a good segment of the market, and has a solid balance sheet. It’s a little rich for my blood, but seems to be a better bet today than KB Home is.

Buy a starter homebuilder

From a future-looking earnings valuation like forward PE, PulteGroup, Inc. (NYSE:PHM) and Meritage Homes Corp (NYSE:MTH), as with their debt-to-equity ratios, seem to have something in common. Both seem to have reasonable balance sheets; and at nearly 20, Meritage Homes Corp (NYSE:MTH)’s forward PE is very reasonable compared to the two prior discussed companies. At 14.9, PulteGroup’s forward earnings valuation is very conservative, especially when compared to the others above.

But what it really comes down to, as all things with investing, is the future opportunity: At nearly 4 times the size of Meritage Homes Corp (NYSE:MTH), PulteGroup just doesn’t offer the same kind of growth. And since none of the companies discussed offer a substantial dividend today, there isn’t an income stream for investors to count on.

Foolish bottom line

Even with the recent interest rate hikes, they are still near record lows. Factor in that new home construction (even with the recent expansion) is still well below historical averages, and I think that even if there is a slowdown, it will be little more than a temporary speedbump in the road to a recovering housing market. As to the companies discussed, I’d put my money in Meritage (I have) first, and Toll Brothers Inc (NYSE:TOL) next. PulteGroup just doesn’t excite me, and KB Home seems overvalued by most metrics.

The article With Rates on the Rise, Is It Time To Flip Housing Stocks? originally appeared on Fool.com and is written by Jason Hall.

Jason Hall owns shares of Meritage Homes. The Motley Fool recommends Meritage Homes. Jason is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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