Anand Chokkavelu (3:40)

Sunrun might have been the hardest hit. Right, Jason, Why was that?

Jason Hall (3:44)

Oh, no doubt about it. It's down more than 40% now. Sunrun is the largest standalone solar installer. Residential solar is by far the biggest part of their business. They market their business as, quote, the nation's leading provider of clean energy as a subscription service offering residential solar and energy storage with no upfront costs on. And with things that have no upfront cost, there has to be somebody that pays those upfront costs, the equipment, the installation, the permitting, all that kind of stuff. Sunrun doesn't exactly have a bunch of money just laying around to do this. It counts on financial partners to do it. And those federal tax incentives, they underpin the entire current financial structure of the installer business. In other words, its business model is, I mean, it's directly at risk here and indirectly. That puts pressure On Enphase and SolarEdge.

Anand Chokkavelu (4:36)

It's rare to see an entire industry fall as much as they are right now, the solar companies. So is this an opportunity to buy or is it a signal to run for the hills?

Jason Hall (4:47)

I'm tempted to call a bottom here because while if this bill gets turned into law, it wouldn't be ideal for the residential market because the liquidity would dry up. And then you have high interest rates, right, that are still putting pressure and holding homeowners back. This may not be an absolute bottom, but I do think this could prove maybe a temporary catalyst in some ways. They're talking about phasing these things out by 2028. So you're going to see a lot more homeowners maybe move forward sooner rather than later. The other thing that's not getting enough attention is how much electricity Costs have increased, especially over the past five or six years when these incentives have been around for a long time. And those increased utility costs are making residential, solar and even utility scale cost effective in a lot of markets. Even with the potential risk of those incentives and then looking at Enphase and solaredge to some degree, I think they're going to be fine. Enphase is super lean. Its manufacturing model and growing European business has allowed it. It's actually generated free cash flow every quarter through this whole downturn and SolarEdge has made some major changes and finally gotten its business more right sized for the cycle. We, we saw residential solar installations actually bottomed a couple of quarters ago and they're starting to grow again. So I think we may have already hit bottom for installations. I'm also comfortable saying that, you know, I think in phase in particular it's probably going to be, I think it's likely a profitable stock from here. If you're thinking multiple years and longer, I like the odds that it beats the market, but let's be honest, it's going to be super volatile. On the utility scale side. First Solar is a rarity that this has been a long term moneymaker for investors. Hardly any other solar panel maker has made money for, for, for anybody. And the reason they've done that is because management's been smart about monetizing their technology but also prioritizing a strong balance sheet for these downturn periods to be able to continue invest and position the business to be successful while everybody else is just fighting to keep the lights on. Here's another little. I don't want to say a magic bullet Anand, but I think for the case of Enphase and First Solar, we don't want to discount. They both do a ton of their manufacturing in the US that's really important to this administration. So I'm not completely convinced that what's in the bill today, and that's changed multiple times is what's going to be in the law. You know, potentially by the time it's signed in the next few weeks.

Matt Frankel (7:19)

I don't have too much to add. He's definitely the solar expert out of the two of us. I would caution investors to keep in mind why we have these tax incentives in the first place. And it's because the cost of solar technology hasn't evolved to the point where it is competitive with traditional energy technologies. But it will eventually get there. The whole idea is eventually they won't need these tax subsidies out of the stocks Jason talked about. I would say that sunrun is the one I'm most inclined to stay on the sidelines. When Jason tells me something he's calling a bottom, I tend to listen. And there are some of the companies he Talked about, particularly SolarEdge is on my radar right now. Sunrun uses a kind of a solar leasing model, meaning that the company gets the tax credit, not the end consumer. Whereas if you buy like, you know, I buy solar panels for my roof, I get the tax credit. So that business model is very dependent on the company getting a steady stream of government revenue. And that kind of scares me, given what's going on right now, more than the other companies, you know, kind of more indirect impacts, you know, their sales will go down, things like that. Would that be fair to say? Jason?

Jason Hall (8:24)

Yeah, I think it's exactly right. The reality is that when you think about highly cyclical industries, and that's certainly the case here, you want to own companies that have some ability to control their future and aren't relying on other people's generosity with financing and that sort of thing. And sun run sunrun's entire business model in any of these large installers, their business model is based on having financial partners and that entire structure could get upended. You look at the end phases in the first solar of the world and one of the things that stands out is the strength of their balance sheet. So they're not having to put out their hat in hand, go hat in hand to, to the markets to raise capital in these environments. Sunrun's business model is constantly built on having capital coming in from third parties.

Anand Chokkavelu (9:07)

When we come back, we get more clues about the economy from the housing market.

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Anand Chokkavelu (9:42)

We don't need a whole litany of numbers guys, but was it a good quarter or a bad quarter for Lennar?

Matt Frankel (9:47)

Matt Lennar's quarter was okay, is the short version. Expectations were somewhat low as they are for pretty much all home builders right now. Given the real estate market. The company did beat expectations on both the top and bottom lines. But new orders, which are really indicative of future revenue, fell way short of expectations. They were on the lower end of the company's gu. The average sales price per home is the real telling factor. It came in even below the low end of the company's guidance range at $389,000. That's 9% lower than it was a year ago. And the short explanation is that home buyers are staying on the sidelines. It's taking more incentives from these companies to sell homes. They're still selling homes, but at what cost? The stock is in the green. I mean, the numbers aren't quite as bad as anyone feared, but it was an okay quarter.

Jason Hall (10:35)

Yeah, I think this is a case of just kind of coming in along the lines of what were pretty low expectations. Anybody that has followed housing knows this is a weird, tough period. There's a lot of demand that's pent up, but there's really limited supply in the high demand markets. Lennar, they build a little bit of everywhere. They're one of the largest builders, and they're seeing some of the impact of some of the less great markets that they work in. That's really affecting it a lot. But these things are kind of playing out across the homebuilder market writ large.

Anand Chokkavelu (11:05)

Folks on our Friday show talked about the housing market is sending lots of mixed signals these days. It's a bit of a housing bellwether, given its size. Did Lenara tell us anything about the housing or the economy?

Matt Frankel (11:17)

Yeah, it told us that housing's still slow, period. I don't think anybody, including the home builders themselves, expected interest rates to stay elevated for so long. At the beginning of 2024, the median expectation. This is according to things like the Freddie Mac survey and things like that, where the rates were going to dip into the 5% range by the end of 2024. Clearly, that didn't happen. Right now, they're around 7%. I don't want to go into the mathematics of home affordability, but mortgage rates play more of a factor in most cases than even home price changes. In addition to Lennar earnings, we just saw today that the home builder sentiment is near its pandemic era. Low when home builders literally couldn't function. Sentiment fell on all three parts of the survey. Sales conditions, sales expectations, and buyer traffic. And it just suggests that people who would love to buy a home are largely moving to the sidelines. 37% of homebuilders, including Lennar, have cut prices this year, and that really tells you all you need to know about the state of the market.

Jason Hall (12:14)

Yeah, a lot of the price, it's not just price cutting. There are other doing other incentives like buying down mortgage rates and using other throwing in free appliance upgrades and that kind of thing. So there's other things too that aren't just lowering prices that are affecting homebuilders and they're getting squeezed on both ends, not just their selling price and promotions, but costs as well. Land, labor and lumber costs are up and we could see more pressure there too, depending on the Trump administration's actions on tariffs. Canadian lumber is a big part of the supply and labor supply. The reality is that undocumented immigrants make up a massive percentage of homebuilder skilled labor in the US So no matter where you stand on the politics, the economic impact of reduced labor supply means higher labor costs and that's more pressure on home builders bottom lines and potentially hindering their ability to build enough supply where there is demand.

Anand Chokkavelu (13:04)

Let's take a quick moment. You know, all three of us are homeowners, have been for a long time. It's kind of interesting when you look at home builders versus you know, you already own a housing asset. So in my mind the bar is a little higher. Matt, how do you think of your own house as an investment, as part of your portfolio of assets?

Matt Frankel (13:22)

One thing I always say is that all investments are assets, but not all assets are investments. Your home is an asset.

Anand Chokkavelu (13:29)

I'm confused.

Matt Frankel (13:31)

All investments are assets. Your stocks you own are assets in your portfolio, but your home is an asset. Renting is a money drain. We can get it to the homeowners versus renters debate. Renting is money flowing out. Owning a home is having an asset that you could borrow against, you could sell if you need to. It's not an investment in the sense that say a rental property is or your stock portfolio is. There's a lot of hidden costs. You're paying for something that you need. You'd be surprised, especially at first, how much of your mortgage payment goes toward interest and not building you equity. It is an asset. I don't look at my own home as an investment, but I definitely look at it as a better financial move if you're going to stay in one place for a long time than renting.

Jason Hall (14:18)

I think anybody that's describing their home as an investment, they're playing a mental trick on themselves to convince themselves that it was the right decision to buy it. I think Peter lynch described it best and went up on Wall street when he said that a home is an enforced savings tool because as you pay down the debt, you and as the market value increases, you do add to your net worth and eventually at some point you can monetize that. But it makes it. It's hard to monetize it and still live in it. So I think the other part of it too, in addition to it being an asset, it's also a liability. You have to deal with upkeep, maintenance, improvements, all of those things that come along with it. So I think Matt's exactly right with the way to think about it. Again with adding that idea of it being an enforced savings tool as well.

Matt Frankel (15:05)

Yeah.

Anand Chokkavelu (15:05)

And I think the worse you are with your money, the more a house saves you later in retirement. I think the numbers say something like of median net worth in the US 2/3 is made up of housing equity. And the proof's in the pudding there. Most people are bad about saving enough and that can save you. If you're excellent at saving money, maybe it doesn't matter so much, but I do like it as a diversifying agent too. After the break, we'll get Jason and Matt's three best housing stocks.

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Anand Chokkavelu (16:08)

Going to play top three. I'm going to list all the big home builders and a few others of interest. And you, Jason and Matt, you're going to give me your top three. For investors looking to buy a home builder, we got Lennar, which we talked about earlier. I'm curious to see where it ranks. Dr. Horton Pulte, NVR, Toll Brothers, Meritage, KB Home Dream Finders Homes, and Green Brick Partners. Jason, what are your three?

Jason Hall (16:34)

So I'm going to start with Green Brick Partners, Tickers grbk, maybe one of the best originators in the industry. They're exceptionally good at finding the right land, building well, pricing and moving through their inventory quickly. Exceptionally good at that. Meritage Homes Ticker mth. This is probably the first of the larger builders to pivot to where the market demand was with entry level and first move up housing back in 2016, 2017. They saw where the puck was going, skated to it and they still have Steve Hilton, the founders executive chairman who's helping navigate and drive the strategy for that business. And lastly, I can't help myself, I've got to order off the secret menu here ans I'm going to go with LGI Homes ticker lgih not one of the ones you listed. It's a smaller builder, more leveraged, but it also has a lot of lower cost entry level housing communities that are coming online this year in markets where there's demand and I think it's really positioned well to be where the market is with all of the pressures that are in place right now.

Matt Frankel (17:39)

We have one overlap here. Dreamfinders is my number one, Green Brick Partners is my number two, and NVR is number three. I will concede everybody's problem with Dreamfinders is that they use more leverage than everyone else. They have a higher debt load, they have the ugliest balance sheet of the nine you listed. And I'll concede that it is a higher risk, higher reward builder, but it has almost exclusive exposure to some of the highest growth markets in the country. Great track record of creating value both through acquisitions and organically. It's a highly profitable company and it trades for 8 times earnings. But on that note, pretty much all of these trade for 11x earnings or less. There's a good valuation case to be made for all of those. NVR is essentially what Dreamfinders wants to be when it grows up. Very similar business model, very land light business model. Greenbrick is a more land heavy model, but you really can't argue with its track record. You just can't. So I Green Greenbrick definitely rounds up my top three.

Anand Chokkavelu (18:38)

Greenbrick's the one that I'm most interested in. Given that both of you have said it and said it many times in the past, I need to get on it. Here at the Motley fool, we live on feedback and track stacking. To be part of that feedback or to ask a question, email us@podcastsool.com as always, people on the program program may have interest in the stocks they talk about, and the Motley fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure. Please check out our show notes for Jason Hall, Matt Frankel and the entire Motley Fool Money team. I'm on in chocolate. We'll see you tomorrow.