Residential real estate continues to show resilience during the coronavirus pandemic and economic downturn.
In fact, during the four-week period ending September 20, home prices grew 14% to $319,978, per Redfin, the largest year-over-year increase since August 2013. The fall months, historically slower for the resi market, are expected to remain hot, too.
Ahead of the next earnings season, Jefferies issued a note raising its estimates on the back of the "V-shaped recovery" in residential housing, expecting "resi-focused" names in building products to deliver strong results.
Four stocks in particular are positioned to beat expectations, the bank said: OC, BECN, MHK, and JELD. "Quality R&R," or repair-and-remodel, stocks should continue to deliver steady returns, Jefferies said, but it sees "more upside" in "commodity-centric" names such as OC and BECN.
Jefferies sees OC (Owens Corning) and BECN (Beacon Roofing Supply) as big winners of the growing demand and low supply ratio driving up the price of insulation, roofing, doors, wallboard, windows, and composite decking.
According to the report, roofing manufacturers have announced price increases of between 5% to 7% in January. When it comes to fiberglass insulation, if supply continues to fall short and demand continues to rise, Jefferies said the insulation market could be sold out by 2021, posting major gains for OC. Per a Jefferies franchise report from late September, insulation manufacturers had to reduce production during the height of the pandemic, resulting in the tightest supply since 2006.
OC is the only manufacturer with extra loosefill capacity, Jefferies noted, which should result in share gains.
According to the report, JELD has also announced a 10%-25% price increase for interior doors which will take effective in distribution on November 30. The increased prices are another prime example of manufacturers taking advantage of the competitive resi climate.
When it comes to MHK (Mohawk Industries), Jefferies notes that while a Catalina Research report on the third quarter projects a 5.2% year-over-year decline, that data primarily accounts for July.
"We believe NA flooring sales likely tracked flat to slightly up," Jefferies said, "with trends improving sequentially during the quarter with MHK rebuilding inventory aggressively, the strength at the home centers, and the announced carpet price increase as better indicators of 3Q demand."
Jefferies remains bullish about MHK's fourth-quarter performance and believes the announcement of an increase in carpet prices is to prepare for pent-up demand as installers start going back into homes.
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