COVER STORY: Big Ripple by Andrew Bary
Highlighted companies: Homebuilders' ETF (XHB), Toll Brothers (TOL), WCI Communities (WCI), Home Depot (HD), Countrywide Financial (CFC), Centex (CTX), Pulte (PHM), Lennar (LEN), KB Home (KBH), Levitt (LEV), Bluegreen (BXG), Whirlpool (WHR), Cendant (CD), Realogy (H), Wyndham Worldwide (WYN), MDC Holdings (MDC), Hovnanian Enterprises (HOV), Lowe's (LOW), Mohawk Industries (MHK), DR Horton (DHI)
Summary: Weak home sales, growing inventories, dwindling orders and falling prices have all contributed to a weakening housing market. Hardest struck have been the home builders, who are off as much as 65% from last summer's highs. But with the investment community firmly entrenched in their bearish outlook, the time to consider catching some bargain-basement prices in housing stocks may be rapidly approaching. Various companies are analyzed in depth (see "Highlighted companies" above, particularly those in bold), considering factors such as book value (many home builders presently trade at or below book value) and price-to-earnings ratio (P/E) -- home builders currently average about 6. While it's possible the current lull is just the beginning of a full-out bust of the housing boom, similar to the tech-stock-bubble bust of the late 1990's, bulls counter that such factors as relatively low interest rates, a still expanding economy, and positive demographic factors bode well for the sector. Many top investors, while admitting they were too early in buying-in to the group, are sticking with the sector, sensing the bottom is near or "within squinting distance." While conceding that "it may be early for housing-related stocks," Bary concludes that with its attractive valuations, the housing market may bottom sooner than later, especially if signs of recovery begin to emerge or if the Fed starts cutting rates, and that these previously battered stocks could take a sharp upturn way before any corresponding growth in profits.
Quick comment: This week's Barron's cover story take a clearly bullish stance on homebuilder stocks, the opposite of Marc Gerstein's must-read argument that homebuilder stocks are a value trap, Lon Witter's prediction in last week's Barron's that the broad market will fall 25%-30% as it becomes clear the housing market is in significant decline, and William Trent's bearish summary of the housing market data. Clearfish Research, in contrast, takes a bullish perspective consistent with this Barron's article, making the case for an easy landing, in which he points out that predictions of housing-market gyrations have historically been unreliable and the numbers behind the headlines continue to surprise the pessimists. As noted in the Barron's article, Toll Brothers CEO Robert Toll argues that the market has illogically lumped together well-capitalized builders and weaker upstarts, providing opportunity for value investors to buy stocks of companies with solid track records at close-to-book-value prices. Note that famed contrarian investor Bill Miller has almost 4% of his portfolio in homebuilder stocks, namely Beazer Homes (BZH), Centex (CTX), Pulte Homes (PHM) and The Ryland Group (RYL). See Bill Miller's entire portfolio as of June 30th, including the allocations to each of these stocks, and the excerpt from his letter to shareholders in which he discusses housing stocks. Seeking Alpha has an easy-to-bookmark section devoted to ongoing coverage of the housing market.