Morningstar's analyst Eric Landry is making a case why housing industry's economics is attractive. The following stocks are mentioned in the article:
DR Horton (DHI)
Pulte (PHM)
Centex (CTX)
Lennar (LEN)
KB Home (KBH)
MDC Holdings (MDC)
Meritage (MTH)
From
Morningstar:
Though the homebuilding industry's cyclicality and capital intensity are obvious negatives on the "wonderful franchise" meter, the industry does enjoy some compelling positives; chief among them, of course, is the impressive returns on capital that most big builders have earned. In fact, all seven of the homebuilders mentioned above have earned returns indicative of a competitive advantage for a while now.
For sure, these returns are in large part due to the huge tailwind of falling interest rates and likely won't look as impressive going forward. Even so, big builders do enjoy some solid advantages. For instance, a builder that buys 20,000 dishwashers annually will get a better deal than one that buys 200. Big builders often get the first crack at juicy land deals. And these days, municipalities often require builders to subsidize the construction of public infrastructure and amenities such as schools, parks, and police and fire stations. Builders who can spread these costs over more units will have a competitive advantage. With desirable areas getting more crowded, these types of advantages will probably grow.
Less obvious, yet still critically important is the nature if the industry's cost structure. Because builders can't really count on captive customers (customers who continually buy a company's product through, say, habit, addiction, or other compulsions like the network effect), their highly variable cost structures are a positive because they don't promote irrational behavior. To illustrate, compare homebuilders to airlines, another industry with relatively low barriers to entry and customers who are not captive. The critical difference is that airlines have cost structures that are largely fixed. This promotes irrational pricing during downturns as each carrier tries to cover its fixed costs, ruining industry profitability. Because builders can quickly cut costs during downturns, they likely won't suffer such behavior for extended periods.
