These are precarious times for the U.S. housing market, and related homebuilder stocks. High-interest rates, a slowing economy, and a recent banking crisis are bad omens for the real estate market. And some analysts are now warning of a housing correction, as others forecast a full-blown crash. Worse, the Dallas Federal Reserve says a new bubble in the U.S. housing market is set to burst. The darkening outlook could spell trouble for a number of homebuilder stocks, and the overall market. That being said, I’d avoid these three homebuilder stocks like the plague.
Summit Materials (SUM)
Summit Materials (NYSE:SUM) makes construction materials for the U.S. residential housing market. Unfortunately, this isn’t a great business to be in, especially with your average U.S. mortgage rate now above 6% in a cooling market. That would explain why SUM is down 10% over the past 12 months. It would also explain why Citigroup (NYSE:C) cut their price target on the stock to $29 from $35, with demand for building materials likely to slump further this year.
In addition, Summit Materials has struggled to show consistent growth since its 2015 initial public offering Also, over the last eight years, the vast majority of the company’s growth has come from acquisitions, with only 2.9% of its growth coming from organic revenue expansion. Between 2015 and 2022, the company spent more than $1 billion buying other construction material companies, taking on debt to do so. This strategy has weighed on Summit Materials’ balance sheet and share price.
Investors would be smart to steer clear of this homebuilder stock.
We’re all familiar with Lowe’s (NYSE:LOW), which sells construction and home-building materials to do-it-yourself consumers and professional homebuilders. The retailer competes aggressively against Home Depot (NYSE:HD). Worse, since last summer, sales have slowed due to a combination of rising interest rates and concerns about an economic recession.
Lowe’s also trails Home Depot in the number of professional contractors who are customers, and it has also fallen behind when it comes to e-commerce sales. While the LOW stock has a decent dividend that yields 2.10%, most analysts seem to recommend that investors buy HD stock instead.
Redfin (NASDAQ:RDFN) is definitively a stock to avoid like the plague, especially with the homebuilding market slowing down. While its stock thrived during the pandemic when people were forced to shop for homes online, RDFN stock has been a basket case over the last year, having declined 52%. The stock has fallen 92% from a pandemic peak of nearly $100 a share down to less than $10 today.
Redfin claims to be disrupting the traditional homebuying process by charging low sales commissions and using technology to make it easier and more efficient for consumers. While that approach was appealing at the depths of the COVID-19 crisis, it has fallen out of favor with both sellers and buyers who prefer to conduct the home buying process in person. The company most recently reported fourth-quarter 2022 earnings that showed its revenue decreased 25%, and announced that it is shutting down its home-flipping business.
On the date of publication, Joel Baglole held a long position in C. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.