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Homebuilder stocks, as represented by the SPDR S&P Homebuilders ETF (XHB), surged 11.2% last week as a number of brokers went positive on the sector. On Wednesday last week, Raymond James upgraded Toll Brothers Inc. (TOL), Lennar Corp. (LEN), and DR Horton Inc. (DHI) to outperform. This was followed by Ticonderoga on Friday, raising the price target on Pulte Group Inc. (PHM), and then today Barclays Capital upgraded DHI to overweight from equal weight and raised the price target to $16 from $13. The improving outlook for homebuilders is based on a number of economic indicators including job growth and consumer confidence that are showing early signs of a turn-around, and also relative stability in the housing market as measured by mortgage delinquencies and new home construction. 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 may be behind us, and that it may now be time to start bottom fishing in the sector.

In this article, via an analysis (based on the latest available Q3 institutional 13-F filings), we identify the homebuilders that are being accumulated and those being distributed by legendary or guru fund managers, such as Warren Buffett, 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. We then crossed that data with the homebuilders for which analysts are projecting improving fundamentals in terms of rising revenue and earnings going forward, and came up with a list of homebuilders with improving fundamentals that are being accumulated by these legendary or guru fund managers, and those being distributed by them.

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.

We determined based on our analysis that guru fund managers taken together are over-weight in the homebuilder group by a factor of 1.8; that is taken together guru funds have invested 0.27% of their capital in the internet content group compared with the 0.15% weighting of the group in the overall market. Furthermore, during the September quarter, these guru fund managers together cut a net $44 million from their $1.20 billion prior quarter position in the group, selling $129 million and buying $85 million worth of stocks in the group.

The following are the homebuilders that guru fund managers are bullish about, and that are also projected by analysts to have improving fundamentals going forward:

Toll Brothers Inc. (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 $10 million in Q3 to their $50 million prior quarter position, and taken together guru funds hold 1.9% of the outstanding shares, significantly less than their 4.8% weighting in the group. The top buyers were SAC Capital Advisors ($7 million) and Schneider Capital Management ($4 million), and the top holders are Royce & Associates ($20 million), SAC ($19 million) and Schneider ($19 million). Overall, 265 institutions hold 82.4% of TOL shares, with Fidelity Investments ($507 million), Wellington Capital Management ($173 million), and State Street Corp. ($145 million) being the largest holders with 15.0%, 5.1% and 4.3% of the outstanding shares respectively. TOL trades at a forward 64 P/E compared with the 20.8 average for the homebuilder group, and its revenue and earnings are projected by analysts to stage a strong turnaround going forward from $1.49 billion and 12c loss in 2010 to $1.61 billion and 32c in earnings in 2012.

Lennar Corp. (LEN): LEN builds single-family attached and detached homes in 14 states, develops and sells residential land, and provides related financial services. Guru funds added a net $7 million in Q3 to their $450 million prior quarter position, and taken together guru funds hold 1.7% of the outstanding shares, significantly less than their 4.8% weighting in the group. The top buyers were SAC Capital Advisors ($7 million) and Keeley Asset Management ($1.3 million), and the top holders are Third Avenue Management ($47 million) and SAC ($8 million). Overall, 303 institutions hold 89.8% of LEN shares, with Fidelity Investments ($516 million) being the largest holder by far with 18.0% of the outstanding shares. LEN trades at a forward 24 P/E compared with the 20.8 average for the homebuilder group, and its revenue and earnings are projected by analysts to improve going forward from $3.07 billion and 51c earnings in 2010 to $3.48 billion and 79c in earnings in 2012.

Ryland Group (RYL): RYL builds single-family detached homes, town homes and condominiums in the northern, southern and western U.S. It also offers complementary mortgage finance services, including loan origination, servicing, and title and escrow services. Guru funds added a net $15 million in Q3 to their $11 million prior quarter position, and taken together guru funds hold 4.1% of the outstanding shares, slightly less than their 4.8% weighting in the group. The top buyers were Third Avenue Management ($12 million) and Glenhill Advisors ($4 million), and the top holders are Third Avenue ($14 million) and Glenhill ($10 million). Overall, 163 institutions hold RYL shares, with Fidelity Investments ($102 million) being the largest holder by far with 15.0% of the outstanding shares. RYL trades at a forward 47 P/E compared with the 20.8 average for the homebuilder group, and its revenue and earnings are projected by analysts to stage a strong turnaround going forward, from $1.01 billion and 86c loss in 2010 to $1.06 billion and 33c in earnings in 2012.

Standard Pacific Corp. (SPF): SPF builds single-family attached and detached homes, condominiums and townhomes in seven states across the U.S. It constructs homes targeting a range of homebuyers, primarily move-up buyers. The majority of its operations are in CA, and it also has presence in the metropolitan markets of FL, AZ, TX, SC, NC, CO and NV. The company, through its subsidiaries, provides mortgage loans to its homebuyers, as well as acts as a title insurance agent performing title examination services for Texas homebuyers. Guru funds added a net $1 million in Q3 to their $5 million prior quarter position, and taken together guru funds hold 1.0% of the outstanding shares, significantly less than their 4.8% weighting in the group. The top buyer was Royce & Associates ($1.3 million), and the top holder is Royce ($6 million). Overall, 129 institutions hold 87.8% of SPF shares, with Matlin Patterson Global Advisers ($283 million) being the largest holder by far with 45.0% of the outstanding shares. SPF trades at a forward 27 P/E compared with the 20.8 average for the homebuilder group, and its revenue and earnings are projected by analysts to improve going forward from $925 million and 10c earnings in 2010 to $1.11 billion and 12c in earnings in 2012.

Besides the homebuilders with improving fundamentals that gurus accumulated in Q3, the following are the top homebuilders that were sold by guru funds in Q3 (see Table):

DR Horton Inc. (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 a net $41 million in Q3 from their $132 million prior quarter position. The top sellers in Q3 were Viking Global Investors LP ($30 million) and Appaloosa Management ($13 million). DHI trades at a discount forward 16 P/E compared with the 20.8 average for the homebuilder group, and its revenue and earnings are projected by analysts to go from $3.55 billion and 77c earnings in 2010 to $4.08 billion and 43c in earnings in 2012.

Pulte Group, Inc. (PHM): PHM builds single-family detached homes, townhouses, condominiums, and duplexes in 67 markets in 29 states. Guru funds cut a net $2 million in Q3 from their $12 million prior quarter position, and the top seller was Appaloosa Management ($2.7 million). PHM trades at a forward 33 P/E compared with the 20.8 average for the homebuilder group, and its revenue and earnings are projected by analysts to go from $4.57 billion and 47c loss in 2010 to $4.23 billion and 19c in earnings in 2012.

Hovnanian Enterprises (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 $1 million in Q3 from their $3 million prior quarter position, and the top seller was Royce & Associates ($1.4 million). HOV currently generates losses, and its revenue and earnings are projected by analysts to go from $1.37 billion and $2.31 loss in 2010 to $1.24 billion and $1.36 loss in 2012.

Beazer Homes USA Inc. (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 cut a net $2 million in Q3 from their $6 million prior quarter position, and the top seller was Appaloosa Management LP ($2 million). BZH currently generates losses, and its revenue and earnings are projected by analysts to improve from $742 million and $2.06 loss in 2010 to $951 million and $1.47 loss in 2012.

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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.

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.

Source: 4 Improving Homebuilders Legendary Fund Managers Are Accumulating, 4 Others They're Selling