Home Builders Riding the Market's Upside

The home builders represent probably the most "humbled" group of stocks out there, a result of a housing debacle that has seen falling home prices, credit shortfalls and waves of foreclosures.

Home builders also represent some of the best "upside" in the market. The stocks have fallen hard, some trading at one fifteenth of their 2005 share prices. And those share prices have fallen so low that the thirteen "biggest" builders total collectively less than $22 billion in market cap. To put the number in perspective, 138 publicly traded companies in the U.S. trade at market caps of $22 billion or higher. Corning (GLW), Costco (COST), DirectTV (DTV), Potash (IPI), and Ford (F) each have market caps higher than the sum total of all publicly traded home builders. Add up TOL, LEN, PHM, NVR, RYL, MDC, SPF, HOV, BZH, KBH, DHI, MTH, MHO and you get the price of Ford.

When will housing come back? One year, two, three, four, five? Who knows? A better question to ask is: will housing come back? That's easier to answer.

First, there is a strong and dedicated political will to keep mortgage rates low, continue housing tax incentives, forestall foreclosures and get unemployment numbers down; all of which will help the industry. Politicians know the importance of this sector: their constituency's jobs and savings are tied to housing.

Second, the companies are doing everything they can to recover: cutting costs, writing down losses and buying back debt at bargain basement prices (for example, BZH and HOV recently bought back a ton of debt).

Finally, at some point, the demand supply equation will shift toward the builders. After all, you have to live somewhere. Who will build the homes? The small private builders have been taken out. There are no foreign companies equivalent to a Kia or Hyundai (HYMLF.PK) or Toyota (TM) to take market share from U.S. builders. The beaten down publicly traded home builders will be the only players and they will bounce back. Four years ago, KBH, BZH, HOV, SPF and LEN were trading at $83, $79, $72, $48, and $67, respectively; now they go for $15, $5, $4, $3 and $14. Even if they only recover to 80% of their former values, you get a 4-14X bagger. Not a bad gain. Most people would be willing to wait for those kind of returns even it takes one year or five.

Disclosure: Long BZH

Comments

[goober1:]

Keep dreamin.The HBs are toast as far as the eye can see. There is no real accoplishmnets being made except extending give aways and they will get another one, but it won't fix them. Until there are jobs and far less unemployed, you are fooling yourself. Nobody is actually doing anyhting to amke any part of the economy better. The opposite is happening at warp speed. It will be illusory at best and that will be at taxpayers raping one more time. How many times can this happen? Now there is the real question?

Oct 13 12:25 AM