Small Homebuilders: A Bargain vs. Book Value

by: Saj Karsan

In a previous post, we saw that homebuilders' market values track decently well with their book values. But those were the largest of homebuilders. Here, we look at Price to Book values for the smallest cap builders. All of these companies (Brookfield (BHS), Comstock (NASDAQ:CHCI), Meritage (NYSE:MTH), Orleans (OHB), California Coastal (CALC) and Tousa) have market caps under $500 million, so they may present opportunities that the large builders don't, as we've discussed here in our discussion about why smallcaps are better investments.

Once again, we see periods of fear as well as exuberance for these stocks. In the early 90s, there was some tremendous opportunity to buy these companies for presumably much less than the land they own! It took several years, but eventually, by the mid to late 90s, those investors got rewarded.

In the first half of this decade, we saw clear evidence that the market was extremely optimistic on land values, as investors were willing to pay more than 3 times book value for many of these companies.

Today, we see some possibilities for some great opportunities. Many of these small companies are trading for much less than their book values. Of course, P/B is just a screening tool. One still has to dig into the financial statements of these companies and make sure there is value there to be had. But if this screen is any indication, there may be an opportunity to buy real estate at bargain prices through these companies, presuming there is a margin of safety to cover any write downs!

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