Residential housing has been a bright spot during these dark times, with uber-low interest rates and tight supply helping to drive demand and prices while the rest of the economy still reels or slowly recovers.
To take your mind off the looming election and a surging pandemic, consider these three residential real estate stocks. One thing they have in common is they're not real estate investment trusts (REITs), so think of them more in terms of their potential price appreciation than dividend income. All three also have rallied as of late but remain well-placed to take advantage of market trends that may well be around for a while.
We chose them for that reason and because they're in different pursuits within the residential housing industry. Here are the basics:
- Lennar Corporation (NYSE: LEN), better known as Lennar Homes, is a Miami-based home construction and real estate company.
- RE/MAX Holdings (NYSE: RMAX) is a Denver-based operator of an international network of franchised real estate brokerages.
- Zillow (NASDAQ: Z) is a Seattle-based provider of online residential real estate data, including its well-known rough price appraisals, that is also moving into direct online sales.
Lennar Homes is making money and has a backlog of orders
Lennar Homes has been in business since 1954 and on the New York Stock Exchange since 1972. It specializes in affordable, move-up, and retirement communities and in 2019 built 51,500 new homes and generated $22.3 billion in revenue.
In its third-quarter 2020 report, Lennar reported $5.9 billion in revenue, about the same as the previous year's quarter, but net earnings of $666.4 million, or $2.12 per diluted share, compared to net earnings of $513.4 million, or $1.59 per diluted share -- up 30% and 33%, respectively.
The company delivered 13,842 homes in the quarter, up 2% from third quarter 2019, but new orders (15,564 homes) were up 16% from a year ago, with a value of $6.3 billion, up 20%. Lennar also is reporting a backlog of 19,697 homes valued at $7.9 billion, up 4% from a year ago.
That means the back-ordered homes alone equals about a third of the company's current annual revenues. Lennar's gross margin on home sales also rose about 300 basis points to 23.1% from a year ago, and operating earnings from its financial services arm nearly doubled in a year, to $135.1 million from $74.7 million.
Lennar just doubled its quarterly dividend to $1.00 per share, and its Oct. 16 closing price of $84.68 is close to its 52-week high of $86.80. It had dipped to as low as $25.42 this spring before quickly bouncing back.
While its stock price is near its all-time high, a P/E ratio of a reasonable 11.72, that backlog of orders and a well-established history of successful homebuilding and product diversification -- financing, insurance, and even solar panel sales and installation in its new-home communities -- makes Lennar Homes a good consideration for a buy and hold, especially if you believe its industry segment has a promising future.
RE/MAX is a household name in the housing industry
RE/MAX is one of the most recognizable names in residential real estate, with a sales force that has steadily grown since 1973 and now numbers more than 130,000 agents working from more than 8,600 offices in more than 110 countries and territories.
The company's combined market share in the U.S. and Canada -- home to about 83,000 of its agents -- has led the market since 1999 in total residential transactions completed, and its four-year-old Motto Mortgage brokerage network is growing fast and should be adding to the bottom line significantly in years to come.
After collapsing to as low as $14.40 a share, RE/MAX has rallied, closing on Oct. 16 at $36.07, within shouting distance of its 52-week high of $40.78 it hit right before COVID-19 struck. Its stock is currently yielding 2.43% after declaring a second-quarter dividend of $0.22 a share, and its P/E ratio of 35.82 doesn't indicate over-pricing.
Along with its Motto Mortgage commitment, RE/MAX has been investing in the varied technology it can provide its brokerages and agents, most recently a location intelligence data company.
All these moves help boost its ability to keep growing its main sources of income: franchise fees, annual dues, broker fees, marketing funds fees, and franchise sales. RE/MAX's top-line position in a resilient industry and record of paying dividends and producing some stock price appreciation since it went public in 2013 means its stock merits consideration for an October buy.
Zillow could add zest to a buy-and-old portfolio
"Have you looked at Zillow?" is a common refrain among couples discussing what their own house or one they're looking at might bring in a sale.
A lot of investors have looked at Zillow, too, driving its stock price from a pandemic dip of $20.04 to as high as $112.49 before settling on Oct. 16 at $97.11. In fact, Zillow stock has shattered its previous record high of just north of $60 a share before the pandemic. But still, it could be a good buy.
Zillow Group owns multiple listing sites and apps for rentals and purchases and makes money by charging property management companies to advertise their listings. It sells advertising on its sites, through added-value websites for agents, and its new iBuying service -- Zillow Offers -- where Zillow itself will buy, fix up, and flip a house.
In its second-quarter earnings report, Zillow said it grew quarterly revenue year over year by 28% to $768 million, driven primarily by growth in its Zillow Offers resale volume. Total adjusted EBITDA was $15.8 million, nearly six times the year-ago quarter. And its $3.5 billion in cash and investments is the most it's had since launching in 2006.
Stock followers like Motley Fool's Andrew Tseng believe Zillow's huge surge in August and September are probably not an aberration. He also thinks Zillow's moves like converting to using its own salaried agents in its iBuying business will soon cut losses in that segment of the company's business and begin adding profits.
That alone will help grow Zillow, which along with its strong online presence -- that second-quarter report noted a record 218 million average monthly unique users and 2.5 billion total visits during the quarter -- and growing ability to capitalize on the income from sales, not just information, should make this a stock for the future.
These 3 could help avert that 'October surprise'
Of course, "October surprise" refers to bad news aimed at a political candidate just before the election. But you don't want that kind of surprise if you're buying stock this month either, and these three stocks seem to offer some stability going forward.
You're not buying them on a dip -- that ship has sailed. But they are still well-established, money-making operations in an essential business that hold promise for growth in good times and resilience in bad.