Which housing stock—Builders FirstSource or Cavco—is a better buy before Fed rate cut?

Investors are gearing up for significant opportunities in the housing sector with expectations that the US Federal Reserve will announce its first rate cut in September.

Jay McCanless, an analyst at Wedbush, advises increasing exposure to housing stocks as lower mortgage rates typically enhance home affordability and stimulate housing demand. 

Among the stocks, McCanless highlights are Builders FirstSource Inc (BLDR) and Cavco Industries Inc (CVCO), both of which are well-positioned to benefit from this anticipated shift in monetary policy.

Why Builders FirstSource is a strong investment

Builders FirstSource, one of the largest building products companies in the US, is a key pick for investors looking to capitalize on the expected rate cuts. 

McCanless views BLDR as a leading supplier in the homebuilding industry, making it a prime candidate to benefit from increased home construction activity. 

The company reported $4.46 billion in revenue for its second financial quarter, slightly missing Wall Street’s estimates. 

However, it exceeded earnings expectations with $3.50 per share, surpassing the forecast of $3.14.

Currently, Builders FirstSource’s stock is trading more than 20% below its year-to-date high in late March, presenting a potential buying opportunity for those looking to invest in the housing sector before the Fed’s rate cuts take effect. 

The dip in valuation could offer a favorable entry point for investors anticipating a rebound in housing demand.

Why Cavco Industries is a compelling buy

Cavco Industries, another recommended stock by McCanless, stands out due to its strong financial position and attractive market segment. 

With a “pristine balance sheet,” Cavco is well-positioned to benefit from the lower mortgage rates expected to follow the Fed’s rate cut. 

The company’s focus on affordable housing solutions makes it particularly appealing in times of stretched affordability.

Despite already experiencing a 30% increase from its year-to-date low in mid-January, Cavco’s stock is expected to gain further as mortgage rates decrease. 

Although CVCO fell short of Street estimates in its most recent quarter, McCanless anticipates a positive turnaround once interest rates start to ease. 

Cavco’s CEO, Bill Boor, also noted a rise in orders and a growing backlog in the company’s earnings release, adding to the positive outlook.

Wedbush Securities has set a $425 price target for Cavco shares, suggesting an 8% potential gain from the current levels. 

This target reflects confidence in Cavco’s ability to capitalize on the upcoming rate cuts and continued demand in the housing market.

With lower mortgage rates likely to drive home demand, both companies are well-positioned to capitalize on this trend. 

Investors should consider these stocks for their potential to provide significant returns in the shifting economic landscape.

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