Top Homebuilding Sector Picks By Legendary Fund Managers

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 |  Includes: BBBY, BZH, CAA, CX, DHI, GFA, HD, HOV, KBH, LEN, LOW, MAS, MHK, NVR, PHM, SHW, TOL, USG, XHB
by: GuruFundPicks

Homebuilder stocks, as represented by the SPDR S&P Homebuilders ETF (NYSEARCA:XHB), surged 12.7% on Tuesday after Freddie Mac released its U.S. Economic and Housing Market Outlook for October that showed apartment rents rising, and new construction starts and loan originations as related to apartments rising, signaling the return of traditional lenders that had curtailed activity during the recession. This is a strong positive to the overall health of the housing sector, and hence homebuilder stocks reacted so strongly upwards. The housing sector has been in a slump falling about 70% since the peak in the summer of 2005, so this is welcome news signaling perhaps that the worst maybe behind us, and that it may now be time to start bottom fishing in the sector.

In this article, we identify homebuilding sector stocks that are being accumulated and those being distributed by legendary or guru fund managers such as Warren Buffet, George Soros, Carl Icahn, Steven Cohen and Mario Gabelli, based on our extensive database of the buying and selling activities of over 60+ such managers. The homebuilding sector is defined here just like in the case of the SPDR S&P Homebuilders ETF ($XHB) to include not just the builders of homes, but also the whole ecosystem in terms of companies that manufacture the building products and those that distribute and retail it to the end consumer. Furthermore, the group also includes manufacturers and retailers of associated home furnishing products.

Based on our research, we identified that guru funds are neutral on homebuilding stocks, cutting a net $45 million from their prior $7.62 billion position in the group, selling $657 million and buying $612 million worth of stocks in the group. Furthermore, overall they are over-weight in the group by a factor of 1.5; that is taken together guru funds have invested 1.8% of their capital in the homebuilding sector companies compared to the 1.2% weighting of the sector in the overall market.

The hedge fund and mutual fund managers included in this select group include only high profile names who by virtue of their long-term market-beating returns have earned their standing in the investment community and are worthy of our attention. They include well-known names such as those mentioned above, as well as perhaps relatively lesser-known names that also have a stellar long-term history of beating the markets, such as Seth Klarman, John Griffin, Prem Watsa, Robert Karr and Lee Ainslie.

The following are the homebuilding sector picks that these guru fund managers are most bullish and bearish about (see Table):

Guru Funds Bearish on Lowes Companies Inc. (NYSE:LOW): LOW operates as a home improvement retailer operating 1,749 stores in the U.S., Canada and Mexico. Guru funds cut $160 million from their $359 million prior quarter position. Top sellers included Viking Global Investors LP ($76 million), Perry Corp. ($50 million), Snow Capital Management ($36 million), Legg Mason Capital Management ($34 million) and SAC Capital Advisors LP ($30 million).

Guru Funds Bullish on Home Depot Inc. (NYSE:HD): HD operates as a home improvement retailer, selling a broad range of building materials, home improvement products, and lawn and garden products to do-it-yourself, do-it-for-me and professional customers via 2,248 stores in the U.S, Canada, Mexico and China. Guru funds added a net $128 million to their $852 million prior quarter position, and the top buyers included Viking Global Investors LP ($86 million), First Eagle Investment Management LLC ($33 million) and SAC Capital Advisors LP ($9 million). The top guru holders of HD stock at the end of the June quarter included Oakmark Funds/ Harris Associates LP ($498 million) and First Eagle Investment Management LLC ($334 million).

Guru Funds Bullish on Cemex Sab (NYSE:CX): CX is a Mexican manufacturer of cement, ready-mix concrete, aggregates and related materials. Its products are used for housing and residential developments, as well as for commercial, institutional and infrastructure projects. Guru funds added a net $46 million to their $862 million prior quarter position, and they are over-weight CX, as together they hold $908 million worth of stock or 24.9% of the company, far in excess of the 5.8% weighting of guru funds in the residential construction sector. Southeastern Asset Management Inc. has the largest position in CX at $908 million, after adding $133 million in the June quarter.

Guru Funds Bearish on DR Horton Inc. (NYSE:DHI): DHI builds single-family detached, as well as attached homes, such as town homes, duplexes, triplexes and condominiums, for first-time and move-up home buyers in 26 states and 72 metropolitan markets. Guru funds cut $44 million from their $149 million prior quarter position, buying $10 million and selling $54 million worth of stock. Top sellers include Viking Global Investors LP ($29 million) and Schneider Capital Management Corp ($21 million).

Guru Funds Bearish on Pulte Group, Inc. (NYSE:PHM): PHM builds single-family detached homes, townhouses, condominiums, and duplexes in 67 markets in 29 states. Guru funds cut a net $8 million from their $17 million prior quarter position, buying $1 million and selling $9 million worth of stock, and the top seller was Balyasny Asset Management LLC ($8 million).

Guru Funds Bullish on KB Home (NYSE:KBH): KBH builds single-family attached and detached homes, townhomes and condominiums in 9 states across the U.S. Guru funds added a net $7 million to their $34 million prior quarter position. The top holders were Zweig-DiMenna Associates ($8 million) and Schneider Capital Management Corp ($1 million).

Guru Funds Neutral on Lennar Corp. (NYSE:LEN): LEN builds single-family attached and detached homes in 14 states, develops and sells residential land, and provides related financial services. Guru funds hold $66 million worth of stock, the same as the prior quarter, including buying and selling $2 million worth of stock. Top holders include Third Avenue Management LLC ($36 million) and Legg Mason Capital Management ($26 million).

Guru Funds Bearish on Gafisa SA (NYSE:GFA): GFA is a Brazilian builder of residential homes and communities and commercial structures across Brazil. Over the last fifty years, they have been recognized as one of the foremost professionally managed homebuilders, having completed and sold more than nine hundred developments and constructed over four hundred million square feet of housing in Brazil. Guru funds cut their entire $56 million from the prior quarter, and top sellers included Fisher Asset Management LLC ($30 million) and Viking Global Investors LP ($26 million).

Guru Funds Bullish on Bed Bath & Beyond (NASDAQ:BBBY): BBBY operates a chain of retail stores that sell a range of domestic merchandise and home furnishing items via 1,139 Bed Bath & Beyond, Christmas Tree Shops, Harmon and Harmon Face Values stores. Guru funds added a net $334 million to their $211 million prior quarter position, including buying $402 million and selling $68 million worth of stock. Top buyers included a new $225 million position by Lone Pine Capital LLC ($225 million), and a new $163 million position by Capital Growth Management LP. Other major holders included Royce & Associates LLC ($80 million) and Hussman Econometrics Advisors Inc. ($54 million).

Guru Funds Bullish on Masco Corp. (NYSE:MAS): MAS is a manufacturer of cabinets, plumbing and other products for the home improvement and new home construction markets in North America and Europe. Guru funds added a net $45 million to their $71 million prior quarter position, and top buyers included York Capital Management Global Advisors LLC ($25 million) and Appaloosa Management LP ($18 million).

Guru Funds Bullish on Toll Brothers Inc. (NYSE:TOL): TOL builds single-family detached and attached homes in luxury residential communities in the U.S. It is also involved in the building or converting of existing rental apartment buildings into high-, mid- and low-rise luxury homes; and developing, owning, and operating golf courses and country clubs associated with planned communities. Guru funds added a net $5 million to their $34 million prior quarter position. Schneider Capital Management Corp was the top buyer, adding $11 million to their $1 million prior quarter position in the company.

Guru Funds Bullish on Beazer Homes USA Inc. (NYSE:BZH): BZH builds single-family and multi-family homes in the west, southeast, east and other regions of the U.S. spanning 15 states. Guru funds added a net $2 million to their $3 million prior quarter position, and the top holder is Appaloosa Management LP with a $5 million position in the company.

Guru Funds Bearish on Hovnanian Enterprises (NYSE:HOV): HOV builds single-family detached homes, attached townhomes, mid-rise and high-rise condominiums, urban infill, and active adult homes in 18 states across the U.S. Guru funds cut a net $4 million from their $9 million prior quarter position. The top sellers were Balyasny Asset Management LLC ($3 million) and Royce & Associates LLC ($1.5 million).

Table

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General Methodology and Background Information: The latest available institutional 13-F filings of over 60+ legendary or guru hedge fund and mutual fund managers were analyzed to determine their capital allocation from among 50+ different industry groupings, and to determine their favorite picks and pans in each group. Each guru has been carefully selected based on their long-term performance and standing in the investment community. Furthermore, the credentials of most of the 60-odd guru funds that justify their inclusion in this elite group were detailed in our previous articles, many of which can be accessed by clicking on the hyperlinks referencing them in the above Table and in the article.

These legendary or guru fund managers number less than one percent of all funds and yet they control almost ten percent of the U.S. equity discretionary fund assets. The argument is that institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When high alpha generating or guru Institutional Investors by virtue of their fund performance, low volatility and elite reputation in the investment community, invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence or even go as far as constructing a model diversified portfolio based on the guru funds best picks.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.