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New Housing Starts Up and Homebuilders Starting to See the Light Again

|Includes:DHI, KBH, MDC, NVR, PHM, RYL, Toll Brothers Inc. (TOL), WY
New Housing Starts Up and Homebuilders Starting to See the Light Again
 
In the middle of April, we posed the question, “Is now the time to get back into the home builders?” With the Philadelphia Housing Index ($HGX) having closed at $79.89, we cited several reasons why we felt it was, in fact, time to get the sector back on the radar. We cited, “… an unexpected sales jump in February and a rise in mortgage applications in March may also signal the housing market is stabilizing.”
 
In addition, we noticed that the price of copper, a principal component used in home construction was surging in price and that its multi-month high suggested that demand by home builders could be growing.
 
So where are we now? Well…we are pleased to report that OTCPicks members who followed our lead have certainly outperformed the broader market. In fact, the Philadelphia Housing Index, the very same index we referenced back in April at $79.89, recently reached a nearly a 10 month high at $102.75---nearly 29% since our original report.
 
And where do we go from here? From a technical perspective, we believe the $HGX, a useful proxy for all the homebuilding stocks, is in the process of completing a very bullish “reverse head-and –shoulders bottom.” In fact, this next leg of the pattern is likely to be extremely profitable as the index retests the $150 resistance level from last fall.
 
From a fundamental perspective, the data released in the month of July was almost universally positive. New homes sales jumped 11%, inventories have continued on a downward trend, mortgage rates have remained at low levels, and existing home sales climbed for the third straight month. Even house prices as measured by the Case-Shiller Index showed the first month increase since their peak in 2006. The only negative in any of the recent housing reports is the fact that foreclosures remain at elevated levels.
Housing Related Stocks:
 
We continue to see value in the following names and believe members should keep them on their radar…
 
D.R. Horton (NYSE:DHI) -- primarily markets its homes to first-time buyers, as well as first-move-up customers. DHI sees a majority of its revenues from Midwestern operations; this area was generally less prone to bubble-type market conditions compared to areas in the Southeast, Southwest, and West.
 
 
KB Home (NYSE:KBH) -- aims at targeting more entry-level homebuyers. We believe that KBH has been more conservative in terms of loading up on pricey land, and more aggressive in moving units; both positives. KBH also has exposure to the French market with operations in that country, which will provide much needed market diversity to help the company weather the current downturn
 
 
NVR (NYSE:NVR) -- is the most conservative homebuilder in terms of how it handles investments in land. NVR exclusively uses options to purchase land and only takes possession when it is ready to develop. NVR is also unique in that it has more cash than debt.
 
 
Ryland (NYSE:RYL) -- looks to be one of the better prepared builders with low debt levels and low levels of land inventory. The company should also benefit from having negotiated most of its land and options in 2004 and prior.
 
 
Toll Brothers (NYSE:TOL) -- maintains the largest land bank in the residential construction industry by a wide margin, with estimates placing land reserves equal to six years of construction. TOL’s market position should allow it to expense more expensive land acquired in recent years over a period of time, allowing the company to maintain its normally high gross margins.-Because TOL focuses on the high-end segment of the housing market, the company should also prove to be more resilient to credit tightening or regulation, as its customers are less dependent on generous financing terms.
 
 
We also think that members should add
these additional names to their radars…
 
MDC Holdings (NYSE:MDC) -- reported a gain in new orders last quarter for the first time since 2005
 
 
Weyerhaeuser (NYSE:WY) -- CEO Dan Fulton said he is “feeling like the worst is over in housing,” though adding that low consumer confidence and high unemployment leave him cautious on the timing of a recovery.
 
 
Pulte Home (NYSE:PHM) -- The company’s homebuilding business involves in the acquisition and development of land for residential purposes within the continental United States; and the construction of housing on such land for the first-time, first and second move-up, and active adult home buyers.
 
 
Probably the biggest positive we hope for from stabilization in housing is that the industry stops being a drag on the economy. “Private investment in the residential” sector is a key contributor to the GDP calculation. The GDP reading just released on Friday showed that the housing market contributed negatively to the U.S. economy for the 14th consecutive quarter. This sector shaved almost a whole percentage point off of economic growth; in a quarter where the reading was a negative 1.0%. Thus, while numbers from the housing sectors are beginning to improve, the net effect is still a bit of a drag on the economy.
 
Most industry experts have said that the sectors that led us into this recession will be the sectors that lead us out and we believe this to be true. Banking and Real Estate began things, and both are starting to show signs of stabilizing and the early stages of recovery and we stress the “Early Stages” part. Still time to get a piece of some nice turnaround stocks that can make our members money as the recovery continues into 2010 and 2011.
OTCPicks.com is located at 3533 Twin Lakes Drive, Prosper, TX 75078, Telephone: (972) 546-3740, Email: Publisher@OTCPicks.com.
 
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Stocks: TOL, MDC, WY, PHM, DHI, KBH, NVR, RYL