Residential construction and the homebuilding sector continue to be in terrible shape, with many of these stocks down considerably from their all-time highs. The S&P Homebuilders Index illustrates this well as it currently sits almost 70% lower than the $45 level it traded back in March 2006. Are these stocks a buy now at such depressed levels and with insiders accumulating shares? Let's take a look.
Pulte Homes (PHM): Insiders accumulated over 70,000 shares on the open market in the last four days. This was rather significant as no insider had made any insider purchases on the open market since February, so it got me thinking if now is starting to look like a bottom for this well-known homebuilder. Unfortunately, upon investigating the fundamentals, I still can't find a good reason to buy even at these depressed levels. The stock on the surface looks reasonably cheap, trading at .85x price/book, .4x price/sales, 1x enterprise value/revenue. Add in the fact that Pulte is trading about 90% less than its all-time high back in July 2005 of $47/share, and this sounds like a screaming buy.
However, the good news seems to stop there when we see that it lost over $1.2 billion in net income these past twelve months, shows negative returns on equity of 47% and profit margins of 31%, and what I believe will be continued declines in the residential real estate market as unemployment remains high and the lack of lending for at least another twelve months.
This grim picture is largely the same for KB Home (KBH), Ryland (RYL), and the other large homebuilders continuing to have negative revenue growth and book value declines through asset write-downs. I firmly believe there will eventually be a recovery in residential real estate, but I don't see that happening soon or their stocks being much of a bargain at today's prices.
However, the best way I see to invest in a real estate recovery are through the mortgage REITs. Annaly Capital (NLY), for example is trading just above 1x price/book, under a 7x price/earnings, and a dependable 14%+ dividend yield as it invests predominately in agency mortgages which are insured by a U.S. government agency or U.S. sponsored entity. This is a buy here at $18/share. Another REIT, Chimera (CIM), is riskier as it only has about 25% of its portfolio in agency mortgages, but it gets more of a return in doing so to compensate for that risk with the performing loans.
As I've written recently, it trades at .9x price/book, 5x price/earnings, and has an over 17% dividend yield, along with some massive insider buying recently. This is a buy at $3/share. If looking for more diversification, America Capital Agency (AGNC) matches Annaly's business model by investing predominately with agency mortgages and trades at a cheap 4.5x price/earnings, 1.1x price/book, and just under 19% dividend yield. That is a buy at $29.50.
Lastly, Invesco Mortgage (IVR) just slashed its dividend, but the selling looks to be over done as the company now trades just above 4x price/earnings, .85x price/book, and still at a 19.5% dividend yield. Trading at these depressed levels, I think the bad news is more than priced in and is a safe buy at $16.25.