Wedbush’s long-term bullish view on housing demand in the U.S. has not changed. However, with the iShares U.S. Home Construction ETF, or ITB, up 37% since the beginning of November versus a 12% S&P 500 gain, the firm believes several names in its homebuilder and home product supplier coverage have already priced in a robust start to 2024. Wedbush identifies several stocks to own, including Walker and Dunlop (WD) and Builders FirstSource (BLDR), but downgrades several others to Neutral on valuation.
SETUP REFLECTED IN STOCKS: Wedbush is downgrading seven names in the housing and housing finance space to Neutral ahead of 2024. Leaving all price targets unchanged, the firm moved to the sidelines on Century Communities (CCS), Masonite (DOOR), M/I Homes (MHO), Meritage (MTH), Skyline Champion (SKY), Taylor Morrison (TMHC), and TRI Pointe (TPH). While its long-term bullish view on housing demand in the U.S. has not changed, Wedbush believes these names and its builder/product coverage have already priced in a strong start to the new year.
WHAT STOCKS TO BUY: Discussing the mortgage space, the firm notes that it recently raised its price target and added Walker and Dunlop to the Wedbush Best Ideas List. It believes that a 10-year UST yield below 4.50% could allow for some incremental boost to Walker and Dunlop’s multifamily transaction volumes. However, even if rates remain elevated, a less volatile rate environment could help to spur continued transaction activity as cap rates adjust to financing costs and negative leverage becomes less severe, Wedbush says.
On the Building Products side, the firm remains Outperform-rated on Builders FirstSource. The company’s analyst day included an expanded discussion and demonstrations regarding the Paradigm/MyBLDR.com rollout which should contribute to an incremental $1B in total revenues by 2026. Builders also expanded the long-term gross margin range to 30% to 33% from 29.5% and provided a revenue and AEBITDA road map through 2026. The company estimates it is only serving 12% of the domestic single-family channel, 2% of multifamily and 1% of the repair and remodel channel which leaves substantial room for future growth, in Wedbush’s view.
Lastly, discussing the Manufactured Housing space, the firm highlights three names, all Outperform-rated: Cavco (CVCO), Legacy Homes (LEGH), and UMH (UMH). In Wedbush’s recent travels with Cavco, management reiterated the Q3 comments regarding stable pricing and a vastly improved inventory situation in the retail dealer channel. Cavco believes the manufactured home community channel is still in the process of destocking but is making progress. Assuming the retail and MHC channels return to more normal ordering patterns in 2024, the firm sees that as a potential volume catalyst for Cavco and Legacy Homes.
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