Should You Buy Homebuilder Lennar As The Housing Market Skyrockets?
Over the last couple months, I’ve shown you stocks to avoid…
Stocks to consider buying…
And some of the best stocks related to the coming Internet of Things… Which you can find linked further below.
All these recommendations are to help you either avoid pain and terrible stocks. Or to help you find potentially great stocks to invest in during this pandemic.
If you do both well, it helps you earn higher than average investment returns and build wealth.
Because the fewer investment losses you have the more capital you keep. And the more capital you keep the faster you compound your money.
Today, I want help you figure this out by answering – Should You Buy Homebuilder Lennar As The Housing Market Skyrockets?
Lennar (LEN) is the United States largest homebuilder by revenue.
It focuses on mainly single-family homes. And it also writes and services mortgages through its mortgage department.
And with the real estate market skyrocketing right now in the US so are its fortunes.
In the last year alone, its stock is up 165.9%
But this is in the past and it doesn’t help us figure out if it’s a great buy now… Especially with the housing market getting even hotter.
That’s what I want to help you figure out today.
It’s based in Miami Florida. It has a $29.66 billion market cap. And it pays a 1.1% dividend… Which is reason #1 to consider buying its stock.
Lennar’s 1.1% Dividend
Over the last decade Lennar’s paid out a total of $2.07 per share in dividends.
At today’s share count of 309 million shares that’s equal to $$639.63 million paid out to shareholders in that time.
It also grew its dividend 294% from $0.16 per share in 2011 to $0.63 per share now.
These dividend payments will help you in normal times earn cash if you take the money out. Or allow you to buy more shares over time if you reinvest the dividends.
The regular payments will help you earn more money for your retirement. And the solid, stable, and growing dividends will help in any kind of prolonged economic issues like we’re dealing with today.
It can do this because it earns solid profits. Which is reason #2 to consider Starbucks for your retirement portfolio.
Lennar Earns Large Profits
Over the last decade it earned an average operating income margin of 10.3% per year.
I look for anything above 10% on a consistent basis so this is great.
Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its negative 0.6% per year on average.
I call this the “Cash Machine” metric.
I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above. If a company surpasses both thresholds it makes it a great operating business that is safe and ultra-valuable.
One metric surpasses what I look for but the other is WAY under what I require… But it’s also not the full story.
All the below average years for both metrics were between 2011 and 2015 as it worked to recover from the housing bust during The Great Recession that crushed home builders like Lennar.
From 2016 to 2020 its average Operating Margin was 11.4%. And its FCF/Sales margin was 8.6% per year.
These large profits helped the company get back on track after recovering from its depths during the Financial Crisis.
And they also allowed Lennar to clean up its high debt levels that got it into some trouble during the last crisis.
Lennar Has Low Debt
As of this writing LEN has $2.39 billion in cash compared to $8.94 billion in debt.
As a percentage of its balance sheet total liabilities make up 39.7%.
Debt makes up 30.1% of its market cap.
And its debt-to-equity ratio is 0.41.
These all fall well below the minimum thresholds I look for… As one example, I look for debt to equity ratios to be below 1.
This low debt adds another large margin of safety to potentially owning its stock. And so far, Lennar looks like a great potential stock to buy… But what about its valuation? Is it cheap enough to buy?
Lennar IS Cheap…
With the markets at or near all-time highs you’d expect a fantastic stock like Starbucks to be selling at an enormous valuation.
But it’s not…
As of this writing its P/E is 9.7.
Its P/CF is 7.
Its forward P/E is 9.3.
And its enterprise value to operating income – EV/EBIT is 9.1.
On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.
And on EV/EBIT I look to buy stocks below 8.
These metrics combined show that Starbucks is massively overvalued right now.
And this means owning its stock does give you a large margin of safety in investing terminology.
When you invest in stocks that have a margin of safety it makes the investment safer. And it also means you should expect to earn higher returns owning it in the coming years.
The inverse of this is also true…
When you invest in a stock without a margin of safety it makes the investment riskier. And it also means you should expect to earn less owning its stock going forward.
With Lennar being massively undervalued right now, its stock offers you a large margin of safety… Especially when you consider all the other great things above.
However, there is one concern you need to be comfortable with before buying its stock.
One Area Of Concern…
If you’re now thinking about buying Lennar stock for your retirement portfolio, I have one word of caution.
Home prices are skyrocketing right now due to near historically low mortgage rates… And because there’s little to almost zero supply of homes for sale out there right now this is leading to a massive increase in home prices and new home building.
In the last year alone, home prices on average have gone up nationwide 10%… In just one year. That’s nuts.
Because of this Lennar is doing great… When the housing market falters, we’ll see how it does. But its stock will fall to some degree.
Probably not to the large degree it did during The Financial Crisis because it’s cleaned up a lot of the debt issues it had then… But it still will fall.
Because of this you need to be comfortable with this risk before buying Lennar stock.
If you’re looking for a solid, safe, stable, and enormously profitable investment to buy to earn high and safe returns for your portfolio – consider investing in Lennar… But only if you’re comfortable with the housing market potentially crashing.
And consider one of the other investments below.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.