Homebuilders Deserve a Second Look

 | Jul 29, 2013 | 10:00 AM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

nvr

,

rgr

,

swhc

,

dhi

,

len

,

kbh

Homebuilders are the worst-performing industry in the Standard & Poor's 500 Index for the past month, down 10% while the index was up 5%. I believe this may give investors a second chance to get onboard a group that I expect to do well the next two to three years.

The shares have been weak because investors see interest rates starting to move up, which could make it harder for people to afford new homes. But I believe traders and investors are missing an important point.

Many people will pull the trigger on buying a new home when they say to themselves, "Better do it now, before mortgages get too expensive." That phenomenon is likely to continue throughout 2013 and 2014, as rates continue to inch up sporadically.

The situation is analogous to the firearms industry. The possibility of stricter gun control is seen as a threat to the industry. Yet sales for Sturm Ruger (RGR) and Smith & Wesson Holding (SWHC) have been extraordinarily strong, as people who might want a rifle or handgun buy before it becomes more difficult.

There is no question that the homebuilding stocks have been laggards this year. They are down 9% for the year through July 26, while the S&P 500 was up 20%. That swoon followed a superb 2012. Homebuilding shares doubled last year, off a very depressed base.

I believe that with affordability now at good levels, with home prices rising and with mortgages still at attractive rates, demand will be strong both for existing houses and new homes. Home prices fell about 30% from the July 2006 peak to the May 2009 trough, and have been rising slowly and erratically since then.

The homebuilder I own for clients is NVR Inc. (NVR), based in Reston, Va. I picked it about nine months ago because its balance sheet was stronger than that of most other homebuilders. The stock doesn't look cheap on current earnings, selling for about 23x the past four quarters' profits.

It looks better on a measure I call the "malt shop P/E." That is the stock price divided by the third-best earnings figure of the past 10 years. It is a quick way to figure a price-to-earnings ratio based on normalized earnings. For NVR, the third best earnings total was $66.42 in 2004. So with the stock at about $900, the malt shop P/E is 13.6.

Here is where that measure stands for a few other home builders right now. D.R. Horton (DHI) is at 7x "malt shop" earnings, Lennar (LEN) at 9x, PulteGroup (PHM) at 9 x, and KB Home (KBH) at 3x.

Some of these companies have debt-to-equity ratios with which I'm just not comfortable. KB Home, for example, has debt of more than four times equity. But I believe it's a good time for investors to poke around and investigate these stocks. I believe the group will climb substantially in the next two years.

Columnist Conversations

I stepped away this morning and we cracked. Yet so far there are fewer new lows on the NYSE thus far (than yes...
Ominous start to fourth quarter trading with second big down day in a row. Market disappointed as Draghi (rig...
An important part of the solar story is something called net metering. SCTY and VSLR say that if it goes away ...
A statistic I use to gauge intraday sentiment is the percentage of stocks trading above or beneath their sessi...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.