Ranking Homebuilders by Discount to Book Value

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 |  Includes: BRP, BZH, CALC, CHCI, CTX, DHI, DHOM, HOV, KB, LEN, MTH, OHB, TOL, XHB
by: Saj Karsan

We saw that market values tend to rotate around book values for homebuilders here. We also saw that markets tend to overreact both to the upside and the downside here, creating buy opportunities. Currently, most homebuilders are trading well below book value. Could this be a buying opportunity? Here they are, ranked by biggest discount to book:

Why such a spread between the top of the list (discounts in excess of 75% book values) and the bottom (barely any discounts!)? It could be that investors believe there are way more writedowns coming for those at the top. Investors may also have more confidence in certain managements' abilities to navigate through these difficult times.
 
Upon closer examination, notice the largest builders tend to have the smallest discounts. If we take a look at the discounts relative to the sizes of the companies, we get a chart that looks like this:
Notice how the largest discounts to book value (in excess of 50%) are for companies smaller than $250M. Also note that the largest companies tend to have the smallest discounts. Could it be that managements for the smaller companies are worse, or that they are more risky, or have higher debt levels? It's possible. Another reason could be that the stock market is less efficient for those smaller companies as we've discussed here (hence we see more variation among the discounts for the smaller companies), since they are too small for many institutions to buy.

It's worth taking a closer look at the companies with the largest discounts to book to see if they offer large margins of safety!