NVR (NYSE:NVR) is one of the leading homebuilders in one of the best markets in the U.S.
It builds homes in 31 metropolitan areas in 14 states. Those states are focused in the Mid-Atlantic, from New York to South Carolina and also include Florida, Tennessee, Ohio, Indiana, Illinois and West Virginia.
It also operates as a mortgage lender, so it’s vertically integrated in the sector.
That also allows it to be more flexible on managing the current rising-interest-rate environment.
For example, if rates are rising and sales are suffering, NVR has more flexibility in how it structures its rates or home pricing to make sales where other builders can’t.
And by concentrating in metro areas, you are usually working with higher-paid workers, so you have better margins to begin with.
All that said, NVR is off 13% year to date. And the homebuilders’ confidence survey that was released earlier this week reported the most bearish numbers of the year and the lowest in six months.
Problems for NVR Stock
Much of this is due to all the tariff talk that has been flying around Washington.
You see, when President Donald Trump went to the G7 talks in Canada the weekend before his trip to North Korea, he pretty much shook the gathering by claiming that he was announcing tariffs on NAFTA trade partner Canada because Canada is now considered a national security risk.
Canadian timber is the lifeblood of the U.S. home building industry. It would raise prices on lumber and those prices would have to passed on, making home prices higher in a rising interest rate climate. Alternately, the homebuilders would have to eat some of the cost increases, which would hurt margins and profitability.
Adding to that, the administrations continued threats to raise tariffs on China’s steel and aluminum imports. While they don’t provide a great deal to the U.S., some of the materials that are used for homebuilding would be affected, again adding to the costs of homes.
Finally, labor costs for the industry are going up. Growing demand means a tighter labor pool that can expect higher wages. This is another threat to margins and profitability.
Pretty doom and gloom, right?
Well, here’s the thing. We know by now that Trump likes to talk tough but will negotiate from a more reasonable position. All this bluster could come to very little at the end of the day.
And if that’s the case, NVR is a bargain at current prices. Also bear in mind that NVR is up 22% in the past 12 months. That’s a solid return, if a bit more volatile than you would expect for homebuilder with an $11 billion market cap.
The point is, if you’re a contrarian, NVR stock is a screaming buy right now.
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Source: Investor Place