Ranking Homebuilders by Discount to Book Value

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!

Comments

[eh]

Or regarding the builders who are trading close to or above book value, it could be that a lot of 'investors' don't know what a value trap is, or could not recognize one if they did.

[nibelung]

I would have liked to see PHM in the chart

[drmalaka]

Anyone suggesting that home builders might be a buy is probably expecting the second half turn around in the economy and real estate to start in two weeks. Oh wait, the second half does start in two weeks.

To speak this way in January was one thing, but to still think at the end of June that we are headed for a strong second half in the economy and a stable second half in home builders is just nuts.

BZH ran from $5 to $12 from Jan to May, MTH from $8 to $24 in the same period. Where are they now? Wanting to buy into these beasts now is repeating the same mistakes. 2010 is when housing might bottom.

MTH and PHM have had nice little runs over the past few days and should be topping out soon in my opinion, next stop...new lows.

[Saj]

Hi User 137327,

PHM is included in this chart here, with the same info: barelkarsan.blogspot.c...

[laurel]

bhs will hold steady then rise because of their holdings and intelligent managment

[laurel]

i believe bhs will hold steady and rise because of their holdings and intelligence of management