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?

2009 Oct 13 12:25 AM

[Reiter]

I like your points, but these stocks will not get back 80% of their prices 4 years ago. The bubble years are gone and won't be supported by easy credit in years. That's not to say they can't get back to 20-25% of those prices in 1-2 years for SPF HOV BZH, if the economy recovers.

2009 Dec 17 10:18 PM

[drbob66]

I like BZH for a longer-term speculative bet that it'll fill the price gap at $18.58 from July 23, 2007. The stock traded up as high as $18.42 on Aug 9, 2007, but never quite filled the gap. It's been all downhill from there, to its current price of $4.16.

If you don't want to gamble on an individual homebuilder stock the XHB also has a price gap in its chart at $28.85 from that same day (or $28.78, the low on July 18 and 21, 2006...depending on how you look at it, there's still a gap). The share price has never reached either of these prices since that time...and it currently stands at $15.02 (so a potential 91% gain).

Either of these could take quite a while, though...it's obviously not gonna happen within the next few years...but I've bought a little for my IRA, so I have YEARS to wait.

The XHB is pretty close to busting through a long-term downtrend line (depending on how you draw it...looks to me like around $18 would be decisive, but I would expect some fireworks if/when it breaks above $16.75). Seems like it's been trading sideways for five months now, and the range has narrowed in the last 8 weeks... so something's gotta give soon.

I agree with Reiter that we're unlikely to see these stocks trading to 80% of their peak prices anytime soon. Still, I've seen a fair number of unrelated stocks fill their price gaps from Nov 2008 in the last nine months for no fundamental (earnings-based) reason (of course, they nearly always plummet immediately afterwards). I wouldn't be too surprised to see some of these homebuilder stocks trade at abnormally high P/E ratios at some point in the future (like when we see an actual turnaround in the housing market...and a few quarters of REAL profits). Heck, I've seen a lot of stocks rise to unrealistic levels for no reason other than that they're going up.

Feb 06 04:58 AM

[Reiter]

BZH is till too highly levered, drbob.

Feb 06 04:45 PM

[drbob66]

Uhh...too highly levered FOR WHAT? For its stock price to rise at some point in the future?

I think you missed the entire point of my comment. It was about a long-term investment (and a speculative one at that). I didn't say anything about fundamentals...because they have almost nothing to do with my thesis.

Feb 06 07:44 PM