The 8 best opportunities on the Stock Exchange now

Looking for the cheapest stocks on the market now? Two industries stand out: home builders and steel makers.

Barron’s were audited for the 10 shares in


S&P 500

index finger,


S&P Midcap 400,

and


S&P Smallcap 600

with the lowest price / profit ratios based on projected earnings for 2022, using consensus estimates from FactSet. Among the group of 30 stocks of the three indices, 14 were home builders and steel producers, all trading just two to four times this year estimates. Many home builders also trade around book value.

The common denominator in both groups is that investors do not believe that today’s strong gains will last. Shares are anticipating catastrophic falls for both sectors that are unlikely to materialize. Building stocks have fallen 40% or more this year.

Losses in the shares of home builders and steelmakers reflect a broad decline in financially sensitive stocks. However, balance sheets have rarely been stronger for these sectors, providing a financial cushion to a possible recession.

While doubling mortgage rates to 6% reduces housing demand, a prolonged and deep recession seems unlikely, given strong demographic trends and limited supply. “Home builders are pricing in an Armageddon scenario and a repeat of the Great Depression when home prices fell by 30%,” said Stephen Kim, a housing analyst at Evercore ISI. “Stocks are cheap and outweigh the risk.”

Kim believes they could double next year.

Bespoke Investment Group noted last week that a 40% drop in home equities from their previous highs marked the sixth such drop in three decades. The average profit for one year after these reductions was 43%, with the only negative indication being in 2006.

The profits of home builders remain at record levels, as seen in

Lennar
‘small

(point: LEN) last quarterly report. Lennar is the No. 2 U.S. builder back

Dr. Horton

(DHI). Lennar acknowledged that the market was softening, but President Stuart Miller said land acquisitions, which hit homeowners during the 2008 financial crisis, were unlikely unless the market fell “completely.” This reassured analysts and investors and Lennar rallied, winning 8%.

At around $ 70 per share, Lennar is trading at four times its projected earnings for 2022 and below its book value of $ 74 per share. Lennar and other manufacturers have boosted stock markets and increased dividends this year.

Wedbush analyst Jay McCanless says stocks are trading at an average of just 80% of tangible book value at the end of 2022. Builders are taking advantage of growing demand from single-family rental companies.

Company / Ticker Recent price YTD Change 2022E EPS 2022Ε Π? Ε 2023Ε Π? Ε Dividend yield Price / Book Market value (billion)
Builders
DR Horton / DHI * $ 64.08 -41% $ 17.14 3.7 4.0 1.4% 1.3 $ 22.6
Lennar / LEN ** 67.66 -42 16.86 4.0 4.3 2.2 1.0 19.6
Toll Brothers / TOL *** 42.41 -41 10.22 4.2 3.8 1.9 0.9 4.9
Steelworkers
Cleveland-Cliffs / CLF $ 16.27 -25% $ 5.77 2.8 4.4 No one 1.4 $ 8.5
Nucor / NUE 107.84 -6 26.36 4.1 8.4 1.9% 1.9 28.7
Stelco Holdings / STZHF 26.34 -19 11.62 2.3 5.9 3.6 1.6 1.9
Steel Dynamics / STLD 67.40 9 20.37 3.3 6.3 2.0 1.8 12.7
US Steel / X 19.07 -20 10.20 1.9 5.4 1.1 0.5 5.0

* Sept. end of financial year, ** Nov. end of financial year, *** Oct. end of financial year, E = Estimate

Source: Bloomberg

McCanless favors Horton, which generated an oversized equity return of 34% in the year ended March. Horton shares, at $ 67, are trading at four times their earnings.

McCanless says high-end homebuilders could be more isolated from interest rate hikes because of their affluent customer base. Favors the builder with a small lid

Tri Pointe Homes

(TPH), is now trading at around $ 16, or three times the profits of 2022. The luxury leader,

Toll Brothers

(TOL), trades around $ 44, or four times the estimated earnings of 2022 and below the book value of $ 46 per share. About 20% of toll buyers do not need a mortgage. pay cash.

Steel stocks are among the most volatile. The companies had overall first quarter record results and headed for similar performance this quarter.

However, stocks have been forged amid fears of a recession, as steel prices, as measured by hot-rolled steel, have fallen below $ 900 a tonne from $ 1,500 earlier this year. Steelmakers should generate enough profit at current prices, suggesting that risk / reward is attractive.

Alan Kestenbaum, CEO of Canadian Steel

Stelco Holdings

(STZHF), says the steel market is becoming “very challenging. “Prices are falling every week.”

Demand prospects are good. The automotive industry, which accounts for 25% of US steel demand, is operating below capacity due to chip shortages and could boost production in 2023. Other key steel users, including infrastructure and energy, are also in good shape. . A positive sign is the consolidation of the industry. Four producers now account for more than 80% of US steel production.

US Steel

(X), at $ 19, is trading for less than twice the 2022 profit. The company’s plan to build a large new $ 3 billion mini-mill has not played well with some investors who see more cash being returned to shareholders.

Cleveland-Cliffs

(CLF), another major integrated steel producer, has no major expansion plans and has a CEO focused on Lourenco Goncalves shareholders. Its share, at $ 16, trades with three times the projected earnings for 2022.

Industry leader

Nucor

(NUE), at $ 107, trades with quadruple gains and yields of almost 2%. He has an attractive business mix, but the distribution of his capital is questionable as he recently agreed to pay $ 3 billion for a garage door maker in a huge premium over his own valuation.

Steel Dynamics

(STLD), which, like Nucor, operates mini mills using scrap metal as input, has completed a large new plant this year in Texas. Her share trades for $ 66, or triple earnings.

Stelco operates a profitable blast furnace plant in Ontario and may have the group’s most investor-oriented CEO at Kestenbaum. Stelco increased its dividend several times and bought back many shares. The share, at about $ 26, returns 3.6% and reaches only twice the estimated profits of 2022.

Extremely cheap stocks can offer good uptrends and a margin of safety. Home builders and steel are eligible.

Write to Andrew Bary at andrew.bary@barrons.com

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