Liquidity Key To Picking Homebuilder Stocks - Citi

New and existing home prices in the United States will likely deteriorate by up to 15% over the coming months, says Citi Investment Research analyst Josh Levin, and near-term liquidity will continue to drive valuations of homebuilder stocks.

The result, Mr. Levin said in a note to clients, is that identifying stocks for which the market has mispriced near-term liquidity “should be the key” for anyone wanting to buy into the sector. Investors should reward those who generate and stockpile cash and avoid those that jeopardize liquidity by, for example, spending too much on land.

Although Mr. Levin is bearish on the housing sector, he says there are some stocks that offer good risk-adjusted returns. He gives Pulte Homes Inc. (PHM) a “buy” recommendation, saying “as it materially improves its cash position over the course of the year,” the stock should trade up. Likewise, Toll Brothers Inc.’s (TOL) relationship with a Middle East sovereign wealth fund could provide it with growth capital and a new earnings stream.

Among the other home builders, he rates the following as “holds”: Centex Corp., D.R. Horton, Inc. (DHI), KB Home (KBH), Lennar Corp. (LEN), M.D.C. Holdings Inc. (MDC) and The Ryland Group Inc. (RYL).

Comments

[Abe Fadley:]

I am accumulating home builders not because I expect them to make profit in the short-term. I am hoping for comdolidation. It is very difficult to determine who will acquire who.

2008 Aug 16 08:55 PM

[number2son:]

Consolidation? Are you kidding? None of these guys are going to waste cash buying a competitor with a deteriorating balance sheet.

2008 Aug 17 10:06 AM

[TBill:]

Surprised NVR wasn't mentioned. Probably the soundest of the homebuilders...

2008 Aug 17 09:22 PM