Builders Looking Constructive Again

 | Feb 09, 2012 | 8:30 AM EST
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Yes, you have heard it before: Housing is primed for a recovery. Before you dismiss such talk, consider the evidence in favor of the case that real estate has hit its bottom and is poised for an uptick.

Homebuilders have been showing improvement. Larry A. Mizel, chairman and CEO of MDC Holdings (MDC) , which builds homes under the Richmond America Homes brand, was quoted in a press release as saying that there have been "increasingly positive signs for the health of the housing market overall and for our individual markets, which lead us to believe that our industry has stabilized and may begin to recover in 2012."

Beazer Homes (BZH), one of the country's 10 largest homebuilders, just reported quarterly results that showed a 36% improvement in year-over-year new-home orders, while home closings jumped 67% from the year-earlier quarter.

On Feb. 4, The Wall Street Journal reported on a trend relating to large housing developments. It seems a number of developments that had been put on hold because of the housing bust are now back on track. The article noted, "As more financing and private-equity investments begin to flow into residential real estate, some mothballed development plans ... are being revitalized. Putting these developments back on track is an indication that some investors and bankers are betting that the worst is over for the housing market and that demand for new homes will rise over the next few years."

The New York Times last month reported that "there is growing sentiment among home builders and economists that the bottom has been reached and construction will increase in 2012. Builders are securing more permits, and the pace of housing starts rose in the fourth quarter [of 2011]."

Not everything about the housing market is positive. The most recent report of home prices by the S&P/Case-Shiller index found that the 20-city index dropped 1.3% in November from October and slipped 3.7% below its year-earlier level.

Yet there is enough positive about the real estate market to make it worth a look to those investors who have a taste for risk. Years ago, when the real estate market was hot, I regularly recommended homebuilders and other companies involved with real estate It has been a long time, though, since any have passed muster. I am happy to report that two are worth your consideration now.

One major player in the housing market that gets a high grade is PulteGroup (PHM). One of the country's largest residential builders, it operates under such brand names as Centex, Pulte and Del Webb. My strategy based on the work of James P. O'Shaughnessy-based indicates that Pulte is on a firm foundation. The strategy likes the company's market cap ($3.2 billion) and earnings per share -- the company has reported losses the past five years, but the losses have gotten smaller each year.

Also in PulteGroup's favor is the company's price-to-sales ratio of 0.77, which is half the maximum of 1.5 allowed by this strategy. Those companies that pass these three tests are then ranked by their relative strength (a measure of how well a stock has done compared with the market during the past year), and the strategy then picks the top 50. PulteGroup is in this top 50 by dint of its relative strength rating of 72.

The second company that gets the attention of my guru strategies is Invesco Mortgage Capital (IVR), a real estate investment trust that acquires, finances and manages residential and commercial mortgage-backed securities and mortgage loans. This firm gets a winning score from the strategy I created that is based on Peter Lynch's writings. The strategy places a lot of value on the P/E/G ratio, which is price-to-earnings relative to growth and is a measure of how much the investor is paying for growth. Invesco has a remarkably low P/E/G of 0.13. A P/E/G up to 1.0 is acceptable, and 0.5 or less is considered very positive. The company's P/E/G is so low principally because its P/E is so low, namely 4.23, despite having a growth rate of 31.61%. Such a low P/E tells you how much investors are avoiding companies in the real estate market. Invesco is also free of debt.

Certainly, the real estate market is not out of the woods. Home sales are sluggish, prices remain weak, and the economy, though showing signs of strength, is still very tentative in its recovery. But if you want to take a chance, now seems a good time to buy into the real estate recovery, and these two stocks are in a strong position to take advantage of any real estate rebound.

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