Has the Market Bottomed Out for Home Builders?

Posted by: 0 in Untagged  on Apr 14, 2009

Could be! Let's take a look. In the midst of the worst housing decline since the 1930s, new home sales are down more than 75 percent from their 2005 high. In fact, just last year homeowners lost $3.3 trillion in the value of their houses with national home prices dropping 11.6% compared to 2007.

Meanwhile, it should come as no surprise that all the major homebuilding stocks have also taken big hits in the last couple of years. But in the stock market, crisis creates opportunity. And we think the worst could be behind these beleaguered stocks? In light of the surprise merger on April 8th by homebuilders Pulte (PHM) and Centex (CTX), we think members should consider positioning themselves for further consolidation in the sector, and subsequent gains in stock prices.

And while being positioned to benefit from a consolidating industry is always exciting, the fundamentals for the homebuilders appear to be improving as well. In fact, an unexpected sales jump in February and a rise in mortgage applications in March may also signal the housing market is stabilizing. Even Pulte CEO Richard Dugas, explained, "We’re cautiously optimistic."

The third reason we think housing is bottoming is based on the price of copper. Copper is one of the principal components used in home construction and its surging price and multi-month high suggest that demand by home builders could be growing. China is starting to wake up and some of the rise in copper might be to demand in China, but we think that the US housing market might have something to do with that as well.

We can’t reiterate enough that the time to buy is when everybody hates a sector and when there is the proverbial “blood in the street.” At this point, we have yet to find anyone who is outright bullish on the homebuilders. There seems to be only degrees of bearishness.

But charts don’t lie. They illustrate not what investors are saying and feeling, but rather what they are doing. And with stocks leading the economy by 6 to 9 months, members should take notice that the “smart money” is betting that a housing recovery will be in full swing by early 2010. But don’t think you can wait until the media proclaims the bear market in housing over. Because if you do, you will likely miss the majority of the move higher in stock prices.

As you can see from our annotated chart, the stock market, in its infinite wisdom, is suggesting that the U.S. home building stocks likely hit an absolute bottom back in March and could be consolidating at current levels as they prepares to make another move higher.

Here are some industry stocks that you might want to put on your watchlists!

D.R. Horton (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. http://www.otcpicks.com/quotes/DHI.php

KB Home (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. http://www.otcpicks.com/quotes/KBH.php

NVR (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. http://www.otcpicks.com/quotes/NVR.php

Ryland (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. http://www.otcpicks.com/quotes/RYL.php

Toll Brothers (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. http://www.otcpicks.com/quotes/TOL.php

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