Are the Homebuilders Cheap?

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Includes: CTX, DHI, KBH, NVR, PHM, TOL
by: Roger Nusbaum

Roger Nusbaum submits: The other day on one of the TV shows someone mentioned that the homebuilders were cheap because they were trading at single digit multiples.

The chart below is from Bloomberg. Bloomberg has a PE function where you can enter the ticker symbol and get a chart of the PE ratio. This is such a useful tool that I am surprised it does not exist elsewhere on the Internet (someone please correct me if it is somewhere).

I am not a fan of using PE ratios as a predictive tool for the overall market. But I do think that PE ratios are useful for trying to value a stock and compare a stock to similar companies.

That the homebuilders are cheap with single digit PEs may not really hold water. Homebuilders always trade a big discount to the market PE ratio-wise, or at least it seems like the discount is always huge.

I picked DR Horton (NYSE:DHI) at random and the concept is evident with this one. In the last seven and a half years, about 90 months, DHI's PE has never gone above 12 and appears to have only been above ten for about six months (my eyeball assessment):

homebuilders.valu

Single digit PE ratios are not new for the homebuilders. In my opinion, calling them a buy because they have single digit PEs paints an incomplete picture. DHI, with its current PE ratio of four might really be cheap though.

I have written before about missing the multi year run that housing stocks have had. I have never understood the supply and demand equation for new homes and I still don't. Every investor has blind spots. Even Warren Buffet and Peter Lynch, who both say they don't really understand tech stocks, have blind spots.

There is no shame in avoiding those parts of the market that you do not understand, assuming you know what you don't know. Diversified portfolios can be constructed and success can be had even if you do have a few blind spots. If you struggle to understand most of the market you might want to reassess whether you need help or not.