Based on key financial metrics such as the price-to-sales ratio, shareholder yield and the price-earnings ratio, the following 3 stocks made the list for top value stocks in the Homebuilding industry. Those looking for value stocks to add to their portfolio may want to use this list as a starting point for further investment research.

Why Focus on Undervalued Homebuilding Stocks?

Value investors seek to buy stocks at a discount to their intrinsic value. Long-term returns show that such strategies are advantageous. Value stocks, as a group, tend to outperform growth stocks over extended periods of time. Typically, value investors perform financial analysis of numerous metrics, don’t follow the herd and are long-term investors.

AAII’s A+ Investor Value Grade is derived from a stock’s Value Score. The Value Score is the percentile rank of the average of the percentile ranks of the price-to-sales ratio, price-earnings ratio, enterprise-value-to-EBITDA (EV/EBITDA) ratio, shareholder yield, price-to-book-value ratio and price-to-free-cash-flow ratio. The score is variable, meaning it can consider all six ratios or, should any of the six ratios not be valid, the remaining ratios that are valid. To be assigned a Value Score, stocks must have a valid (non-null) ratio and corresponding ranking for at least two of the six valuation ratios.

What Goes Into AAII’s Value Grade?

Stock evaluation requires access to huge amounts of data as well as the knowledge and time to sift through it all, make sense of financial ratios, read income statements and analyze recent stock movement. AAII created A+ Investor, a robust data suite that condenses data research in an actionable and customizable way suitable for investors of all knowledge levels, to help investors with that task.

AAII’s proprietary stock grades come with A+ Investor. These offer intuitive A–F grades for more than just value. It is possible for a stock to appear cheap based on one valuation metric but appear expensive on another. It is also possible for one valuation ratio to be associated with outperforming stocks during certain periods of time but not others. Some stocks may even have null values for certain metrics like the price-earnings ratio or the price-to-book ratio but not others. An example of this would be a company with losses instead of profits or a negative book value because of heavy borrowing. Negative earnings or book value result in non-meaningful ratios that are left blank or null.

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3 Undervalued Homebuilding Stocks

Of course, there are countless value stocks that are worth mentioning, but this is a concise list of the top 3 undervalued stocks in the Homebuilding industry for Wednesday, August 21, 2024. Let’s take a closer look at their individual scores to see how they measure up against each other and the Homebuilding industry median.

The Value Grade is assigned based on how each stock’s composite valuation compares to all other stocks.

The process for assigning grades starts with each variable for a given stock. The percentile rankings for all valid ratios that a stock has are calculated. So, for instance, a stock could have a price-to-book ranking in the 43rd percentile, a price-earnings ranking in the 67th percentile, a price-to-sales ranking in the 23rd percentile, etc. Then, those rankings are averaged for each stock. (A minimum of two valid variables are required, though all six will be used if available.)

Once the average of the individual variables is calculated, that average is ranked against all stocks. Put another way, each stock’s composite valuation is compared to all other stocks. These ranks are then sorted into quintiles from the cheapest 20% (a grade of A) to the most expensive 20% (a grade of F).

As always, we recommend that you conduct proper due diligence and research before investing in any security. We also suggest that investors utilize numerous grades, not just value, when it comes to deciding whether a company is a good fit for their allocation needs.

KB Home’s Value Grade

Value Grade:

KB Home is a homebuilding company. The Company's segments include homebuilding and financial services. The homebuilding segment is engaged in the acquisition and development of land primarily for residential purposes. The Company builds a variety of new homes, including attached and detached single-family residential homes, townhomes and condominiums, designed for first-time and first move-up, as well as second move-up and active adult, homebuyers. It offers homes in development communities, at urban in-fill locations and as part of mixed-use projects. The financial services segment offers various insurance products to its homebuyers in the markets where the Company builds homes and provides title services in certain of those markets. Its financial services also provide mortgage banking services, including residential consumer mortgage loan originations, to its homebuyers indirectly through KBHS Home Loans, LLC, an unconsolidated joint venture between the Company and a third party.

Stocks with a Value Score from 81 to 100 are considered deep value, those with a score between 61 and 80 are value and so on.

KB Home has a Value Score of 80, which is considered to be undervalued.

When you look at KB Home’s price-to-sales ratio at 0.94 compared to the industry median at 0.94, this company has a higher price relative to revenue compared to its peers. This could make KB Home’s stock fairly attractive for value investors.

KB Home’s price-earnings ratio is 10.62 compared to the industry median at 9.72. This means it has a higher share price relative to earnings compared to its peers. This could make KB Home less attractive for value investors.

Now, let’s assess KB Home’s EV/EBITDA ratio, also known as enterprise multiple. At 8.3, when compared to the industry median of 7.3, the company may be considered overvalued in relation to its peers. Value investors could use the enterprise multiple to identify stocks that are considered overvalued or undervalued relative to their industry.

Shareholder yield is the sum of a stock’s dividend yield (paid over previous 12 months minus special dividends) and the percentage of net share buybacks over the previous 12 months. KB Home’s shareholder yield is higher than its industry median ratio of 1.12%. Value investors may look for an attractive shareholder yield because it can be a powerful tool for identifying if the company has a good management team.

As one of the most common value metrics, the price-to-book ratio evaluates a company’s current market price relative to its book value. KB Home’s price-to-book ratio is lower than its industry median ratio of 1.65. This could make KB Home more attractive to investors looking for a new addition to their portfolio.

Lastly, let’s take a look at KB Home’s price-to-free-cash-flow ratio (P/FCF), which can indicate a company’s market value relative to its operating cash flow. KB Home’s price-to-free-cash-flow ratio is lower than its industry median ratio of 15.89. This could make KB Home more attractive because the lower P/FCF ratio indicates that KB Home is undervalued. The P/FCF ratio metric can also be viewed over a long-term time frame to see if the company's cash flow to share price value is generally improving or worsening.

Sekisui House Ltd - ADR’s Value Grade

Value Grade:

Sekisui House Ltd is a Japan-based company engaged in the design, construction and contracting of industrialized housing and related business. It operates through eight business segments. The Real Estate Fee segment performs subleasing, management, operation and brokerage of real estate. The Rental Housing segment designs, constructs and contracts rental housing and medical and nursing facilities. The Detached House segment designs, constructs and contracts detached houses. The International segment sells detached houses, condominiums and residential land, as well as develops and sells condominiums and commercial facilities. The Urban Redevelopment segment develops office buildings and commercial facilities and manages and operates owned real estate. The Condominium Housing segment is engaged in the design, construction and contracting of houses. The Renovation segment expands and renovates houses. The Condominium segment sells condominiums. It also operates the exterior business.

Stocks with a Value Score from 81 to 100 are considered deep value, those with a score between 61 and 80 are value and so on.

Sekisui House Ltd - ADR has a Value Score of 79, which is considered to be undervalued.

Sekisui House Ltd - ADR’s price-earnings ratio is 11.1 compared to the industry median at 9.7. This means that it has a higher price relative to its earnings compared to its peers. This makes Sekisui House Ltd - ADR less attractive for value investors.

Sekisui House Ltd - ADR’s price-to-book ratio is higher than its peers. This could make Sekisui House Ltd - ADR less attractive for value investors when compared to the industry median at 1.65.

You can read more about Sekisui House Ltd - ADR’s key financial metrics like shareholder yield, price-to-free-cash-flow and EV/EBITDA ratio, or learn more about its Momentum and Growth Grades, by subscribing to A+ Investor.

Toll Brothers Inc’s Value Grade

Value Grade:

Toll Brothers, Inc. is a builder of luxury homes. The Company designs, builds, markets, sells and arranges financing for an array of luxury residential single-family detached home, attached home, master-planned, and urban low-, mid-, and high-rise communities. The Company operates its own architectural, engineering, mortgage, title, land development, insurance, smart home technology and landscaping subsidiaries. It also develops master-planned and golf course communities as well as operate, in certain regions, its own lumber distribution, house component assembly and manufacturing operations. The Company also caters to urban and suburban renters under the brand names Toll Brothers Apartment Living and Toll Brothers Campus Living. It designs, builds, markets, and sells high-density, high-rise urban luxury condominiums with third-party joint venture partners through Toll Brothers City Living (City Living). The Company operates in approximately 24 states and in the District of Columbia.

Stocks with a Value Score from 81 to 100 are considered deep value, those with a score between 61 and 80 are value and so on.

Toll Brothers Inc has a Value Score of 80, which is considered to be undervalued.

Toll Brothers Inc’s price-earnings ratio is 9.1 compared to the industry median at 9.7. This means that it has a lower price relative to its earnings compared to its peers. This makes Toll Brothers Inc more attractive for value investors.

Toll Brothers Inc’s price-to-book ratio is lower than its peers. This could make Toll Brothers Inc more attractive for value investors when compared to the industry median at 1.65.

You can read more about Toll Brothers Inc’s key financial metrics like shareholder yield, price-to-free-cash-flow and EV/EBITDA ratio, or learn more about its Momentum and Growth Grades, by subscribing to A+ Investor.

Other Homebuilding Stock Grades

Value is just one of the five Stock Grades included in our A+ Investor service. AAII members can see the top-graded stocks—those with grades of A or B for value, growth, momentum, earnings estimate revisions and quality—on the A+ Stock Grades Screener.

Also, if you want full access to all of AAII’s premium services, you can subscribe to one convenient bundled plan called AAII Platinum where you can try out A+ Investor, AAII Dividend Investing, the Stock Superstars Report, Growth Investing and VMQ Stocks. With the other premium services, you can dive deep into additional metrics, portfolios, commentary and information about Homebuilding stocks as well as other industrys.

Choosing Which of the 3 Best Homebuilding Stocks Is Right for You

Choosing which value stocks to invest in will ultimately depend on your individual goals and allocation; however, comparing similar value stocks in the same industry can help you analyze which might be better investments for you in the long run. So, let’s take a look at the Value Grade for all of our stocks.

• KB Home stock has a Value Grade of B.
• Sekisui House Ltd - ADR stock has a Value Grade of B.
• Toll Brothers Inc stock has a Value Grade of B.

Now that you have a bit more background about each of the 3 undervalued stocks in the Homebuilding industry as well as their overall grades, it’s time for you to conduct additional research to see if these could fit your portfolio needs based on your goals and risk tolerance. AAII can help you figure out both and identify which investments align with what works best for you.

We do so through a program of education that teaches you to invest for yourself and become an effective manager of your own wealth—no more relying on others for your financial independence. You can rely on AAII for timeless articles on financial planning and stock-picking, unbiased research and actionable analysis that makes you a better investor.

A+ Investor adds to that qualitative teaching by giving you a powerful data suite that helps you whittle down investment decisions to find stocks, exchange-traded funds (ETFs) or mutual funds that meet your needs.

Additional Resources About Homebuilding Stocks

Want to learn more about Homebuilding stocks to see if they could be the right investment for you? Check out some additional resources and articles to help you on your financial journey.

• 3 Undervalued Homebuilding Stocks for Wednesday, August 21
• What You Need to Know About Toll Brothers Inc's Q2 Earnings
• 3 Undervalued Homebuilding Stocks for Monday, August 19
• Why Meritage Homes Corp’s (MTH) Stock Is Up 4.02%

AAII Disclaimer

We make no representations or warranties that any investor will, or is likely to, achieve profits similar to those shown, because past, hypothetical or simulated performance is not necessarily indicative of future results. Before making an investment decision, you should consider your circumstances and whether the information on our content is applicable to your situation. This information was prepared in good faith and we accept no liability for any errors or omissions. The full disclaimer can be read here.