Shares of heavyweight PulteGroup for housing are down more than 5% in January.
Expected rate hikes and ongoing supply chain problems have put pressure on both PHM stock and its competitors.
Long-term investors may want to consider investing around current levels.
Shares of homebuilder PulteGroup (NYSE:) are down 5.5% since the beginning of the year, but are still down 13.4% in the past 52 weeks. In comparison, it is up 16.8% in the past 12 months, although it lost more than 13.2% in January.
On May 10, PHM shares, which closed yesterday at $54, passed $63 and hit an all-time high. The stock's 52-week range was $42.31 – $63.91, while its market capitalization (cap) is $13.7 billion.
Recent statistics released by the US Census Bureau and the Department of Housing and Urban Development show that 1,702 million units were reached in December 2021 – the highest level since March 2021. In December 2020, the number was 1,661 million units. Meanwhile, it also increased 6.5% year-on-year (year-on-year).
Between 2019 and 2022, the U.S. housing industry grew at a compound annual growth rate (CAGR) of more than 4%. But despite continued optimism for 2022, analysts are seeing headwinds, mainly due to "supply chain disruption and sourcing challenges".
Analysts are also debating the possible effect of expected rate hikes on the sector.
By revenue, Atlanta-based PulteGroup is the third largest homebuilder in the US. Other leading names include DR Horton (NYSE:), Lennar (NYSE:), NVR (NYSE:) and Toll Brothers ( NYSE:).
PulteGroup released Q3 figures on October 26. Investors were pleased to see a $3.48 billion increase, an 18% year-over-year increase. Net income of $476 million translated into adjusted earnings per share (EPS) of $1.82. A year ago, earnings per share were $1.34.
During the quarter, net new orders came in at 6,796 homes and were valued at $3.8 billion. Meanwhile, the homebuilder paid $37 million in dividends and bought back $261 million in common stock.
About these stats, CEO Ryan Marshall said:
“Our strong operating results and resulting cash flow also enabled the company to invest $1.1 billion in land acquisition and development… The housing sector continues to experience strong demand, but significant disruptions in the production and supply of many construction products are generally expanding. building cycles.”
Prior to release of quarterly results, PHM stock was trading at around $49. By the end of December, shares were above $58. But on Jan. 24, Pulte's stock closed at $54.00. As such, the price now supports a dividend yield of over 1.1%. .com, PHM shares have a "outperform" rating.
Chart: Investing.com
Analysts also have a median 12-month price target of $65.58 for the stock, representing an increase of approximately 21% from current levels. The 12 month price range is currently between $52 and $86.
Similarly, the average fair value for PHM shares through InvestingPro is $79.07.
Source: InvestingPro
In other words, fundamental valuation suggests that stocks could rise by about 46%.
We can also look at the financial health of PulteGroup, as determined by ranking more than 100 factors against peers in the consumer discretionary sector. In terms of cash flow, growth and profit, it scores 4 out of 5 (top score).
Source: InvestingPro
PHM's overall performance is rated "great".
Currently, the P/E, P/B and P/S ratios are 8.0x, 1.9x and 1.1x. By comparison, those stats for its peers are at 8.5x, 1.6x, and 0.7x.
Meanwhile, we can also look at the comparable statistics for other leading homebuilders, including DR Horton, Lennar, NVR and Toll Brothers.
As the above numbers show, homebuilders' valuations vary widely. However, compared to a host of other stocks, especially growth names that have reached frothy levels in 2021, these homebuilders typically offer better value at the moment.
PulteGroup is expected to announce Q4 earnings on Tuesday, February 1, prior to opening. As a result, we expect PHM stocks to be choppy in the coming days and come under even further pressure. Depending on Wall Street's reaction to the numbers, the potential could slide towards $50 again. However, we expect another bull leg to start higher in Pulte stocks soon. PulteGroup bulls with a two- to three-year horizon that are not concerned about short-term volatility may want to consider capitalizing on the declines. The target would be $65.58, which is the consensus expectation of the analysts at Investing.com.
Alternatively, investors may consider buying an exchange traded fund (ETF) that has PHM as a stake. Examples include:
iShares US Home Construction ETF (NYSE:)
The Acquirers Fund ETF (NYSE 🙂
First Trust Rising Dividend Achievers ETF (NASDAQ:)
Invesco S&P 500 Equal Weight Consumers Disc retionary ETF (NYSE:)
Finally, investors who believe that PulteGroup stock could continue to appreciate in value into the new year should consider selling a cash-backed put option in PHM stock – a strategy we employ regularly. Because it concerns options, this setup is not suitable for all investors. want to receive premiums (from put sales) or possibly own PHM stock for less than their current market price of $54.00.
This strategy may be appropriate if investors are currently somewhat optimistic or neutral about Pulte stock. Selling cash backed put options on PHM would generate income as the seller receives a premium.
For example, if investors sold the $50 strike put that expires on April 14, they could collect about $2.40 in premium. Therefore, the maximum return to the seller at maturity would be $240, excluding trading commissions and fees, if the option expires worthless.
If the put option is in the money (meaning that PHM shares are below the $50 strike price) before or on the April 14 expiration, this put option can be assigned.
The put seller would then be required to purchase 100 shares of PulteGroup stock at the put option's strike price of $50 for a total of $5,000 per contract. In that case, the trader owns PHM shares for $50 per share.
If the put seller is allocated stock, the maximum risk is similar to that of stock ownership (in other words, the stock could theoretically fall to zero), but is partially offset by the premium received ($240 for 100 shares) ).
The breakeven point for our example is the strike price ($50.00) minus the option premium received ($2.40), i.e. $47.60. This is the price at which the seller would lose money.
Cash-secured put selling is a fairly more conservative strategy than buying a company's stock at the current market price. This could be a way to take advantage of any hitches in PulteGroup stock in the coming weeks, especially around the earnings release.
Investors who end up owning PHM shares as a result of selling puts may further consider setting up covered calls to increase the potential return on their shares. Thus, selling cash-backed puts could be considered the first step in owning stock.
