Homebuilder stocks that are still worthwhile

They've been surging this year as the housing market finally revives, so the trick is finding attractively valued shares.

By Jonathan Berr May 29, 2013 9:11AM
The housing market is on a tear. On Tuesday, the closely watched S&P/Case-Schiller Home Price index, which measures prices in 20 cities, posted its largest annual gain since April 2006. Several markets, including Los Angeles, Seattle and Charlotte, N.C., posted their biggest increases in seven years. Helping the market is the surge in consumer confidence, which recently rose to its highest level since February 2008.

Not surprisingly, shares of homebuilders have posted some huge gains. D.R. Horton (DHI), which builds more homes than anyone else, has jumped more than 30% so far this year, while Toll Brothers (TOL), the largest builder of luxury homes, has gained more than 11%. KB Home (KBH) has rocketed more than 46% and even expects to be profitable this year, reversing a 2012 loss of $1.56 billon. Lennar (LEN), which last quarter tripled earnings, has risen more than 8%.

 

However, you can still find some compelling values among these stocks even though investors are already factoring the improving housing market into their prices.

 

Home under construction (© Corbis)Take D.R. Horton. CEO Donald J. Tomnitz recently said the first half of its 2013 fiscal year was "phenomenal" and that the company expects the second half to be "even better." The stock trades at price-to-earnings multiple of 8.52, the lowest of its peers. Analysts have a 52-week price target on the stock of $27, about 4% higher than where it currently trades.

 

Toll Brothers and Lennar are also fairly cheap, trading at multiples of about 13. They're also both trading under their 52-week price targets. Toll Brothers recently noted that the average price of homes it delivered rose 3.6% to $577,000. The Horsham, Pa., company would give investors exposure to the luxury consumer, although Toll disappointed earlier this year.

 

Lennar, which has said its spring selling season was off to a strong start, pays a dividend and Toll does not, which makes it a good second choice after D.R. Horton in this sector.

 

Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter @jdberr.
24Comments
May 29, 2013 10:28AM
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Housing?  New housing builds and smoke and mirror investment schemes is what got us in this mess. These clowns are/were a huge part of the problem, basically building housing for investors driven by cheap and easy money, greased by congress and the Fed and administered by Goldman, Leahman et al.  The US must fundamentally and structurally change, which we have not.  Not one thing has changed since 2008 except we spend more and borrow more digging ourselves deeper into a Greece-like situation.  The lefties shouted during both of the last two elections, "we can't go back to the failed Bush policies" - hey folks, the #1 policy of Bush that caused the majority of the problems was the Fed policy; which the new pres has not only embraced but has 10-tupled down on.  So when you hear, "we can't go back to the Bush era", tell them to shut up, we already there times 10.

May 29, 2013 10:11AM
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Housing is going nowhere. Materials are too expensive to make a profit. And if the free money is withdrawn even a little, the 2007 crash will be nothing compared to what will come. No matter how much Bernanke intervenes, eventually, prices will come down to what the average guy can afford at an 8% interest rate, even in California. If he wants to help the economy why doesn't he intervene in the labor market and raise people's stagnant wages, or lower prices of gas, food, etc. Now that would help.
May 29, 2013 9:22AM
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oh yea, keep going!!  Doesn't matter if we're trillions and trillions in debt as long as you don't think about it.  Don't worry be happy.
May 29, 2013 11:12AM
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Big home builders aren't going anywhere. Renovators and new companies specializing in affordable alternative and profit-generating home add-ons will have the legs. The future of housing is deterent on our ability to break free from oil reliance and create infrastructure that doesn't command most of our income for transportation and shelter costs.

 

Anybody notice that Fat Cat- an obvious retirement broker shyster- never seems to be with the times or the prevailing trends? It's pretty SCARY to think that he/she/it handles other people's monies. Makes you wonder if any of his clients are coherent or actually know what he posts on these blogs.

May 29, 2013 11:38AM
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Housing is booming in some parts of the country.Much of Florida is doing good.Here in

the Southwest, houses are at all time highs.

May 29, 2013 12:04PM
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BTW, I always marvel at no matter what the economic disaster is we always find a way to select the best man for the job.

For example, Dr Volcker during the worst period of inflation, and now Dr Bernanke during the worst economic crisis in our history or the world's. 

Dr Bernanke couldn't be a better man for the job to manage the Fed during this period. He has taken on bold and innovative measures that men of lesser intelligence and courage would never have attempted. His educational background was ideal for the job too. His PhD is from MIT, and his doctoral dissertation dealt with the causes of the Great Depression which was a cake walk compared to our current economic situation.

As for most of you, you are ignorant (often stupid), ill educated, and brain dead individuals. Your views come from idiots that sensationalize the economic news not really understanding it themselves. A few of you might have some hope of redemption, but it would take a lot of serious study to appreciate exactly what is going on in the world of finance and economics. 

Otherwise oink off!
May 29, 2013 11:25AM
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Is it just me that thinks that MSN puts out these articles at the WRONG TIME ?

 

Going into the summer months is the absolute worst time for housing.

HELLO-HURRICANE SEASON STARTS IN JUST 3 DAY'S !!

 

And if you live in the mid west, you don't buy a home during tornado season-or the west during the fire season. people usually wait until that seasonal weather is past them.

 

 

May 29, 2013 11:49AM
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Let's  talk about the Fed. Few people have any inkling of exactly what the Fed is up to, and most believe Dr Ben and his henchmen are part of SPECTRE! First a few facts about the what the Fed does. The Fed controls monetary reserves and not the money supply. The latter is a result of bank lending and re-lending. Next the Fed doesn't print money, that job belongs to treasury.

The next biggie is except for Fed Funs rate, the shortest end of the yield curve, the Fed doesn't control interest rates. What it does to is cajole, manipulate, psychologically intimidate, and any other means short of economic means (supply and demand). Paul Volcker was a master intimidator with his imposing stature and huge cigar stuck in his mouth. Unfortunately, Dr Ben is a quiet soft spoken fellow who otherwise would be ignored except for his position as Chairman of the Fed.

The global bond market is around 100 trillion dollars plus a few billion. Of that amount, our share is around 40%. The Fed's purchases are a mere 85 billion a month or around a trillion over a years time. In any month within the time frame of QE(quantitative easing), it represents .0008333% of the bond market activity or 1% on a yearly basis. Now the Fed is a big player, but it is hardly the market. If holders of bonds were unhappy with the price or yield of their investment, they could sell (or buy) them at any moment they choose. The reason they don't is they consider the Fed's activity and influence as the most knowledgeable player in the market. BTW, the Fed's influence extends to the global bond market. 

Most of the Fed's policy has been to increase monetary reserves (buying treasury instruments), but it has also has purchased assets such as mortgage-backed securities. In both cases, it has sought to keep interest rates at levels to promote economic activity. In some cases, it has taken some assets of the books of banks and business organization to help shore up their capital structures. The whole purpose is to increase or inflate the worth of financial assets. The best way to understand how important this is to our economy is to consider the detrimental effects of deflation or falling prices. The Fed's success in its efforts is clearly seen in rising stock prices which will continue to rise over the next several years. 

The Fed has a dual mandate to keep interest rate at a level to promote economic growth and employment (UE less than 6.5%) while keeping inflation contained (less than 2%). So far it has managed to contain inflation while unemployment continues to fall (currently 7.7%). 

Now comes the problem of the Fed unwinding QE or "sterilizing" it bonds purchases.  Just as QE has taken place over many months so will the unwinding. The bond market will get plenty of notice, and portfolio managers will make the necessary adjustments to their portfolios. Obviously as rates backup, prices of bonds will fall, but this will take place in an orderly fashion. Another factor which will drive the Fed's strategy is as the economy improves, inflation will start ticking up. The Fed can't afford to get behind the curve regarding inflation due to policy lag and will be forced to withdraw reserves from the banking system ahead of it. 

The Fed's job is hideously complex, but it manages to carry it out smoothly without much notice or fanfare from the public. 

May 29, 2013 11:11AM
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If you are complaining about the price of gas, and wages, maybe you should get your head out of the sand, and travel a littlie!
May 29, 2013 12:08PM
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Yeah I worked in Construction management for these boneheads...All they cared about was their stock and supporting bad home loans to support their loan providers. I was part of the over building homes process, watching communities grow from a vacant lot to hundreds of homes.

Then when the economy failed I watched every family I moved into their homes lose them a year or two later. I watched happy families turn to empty divorces and tearful children...and you can thank the banks and gov't for destroying our society.

You can easily blame the people for buying homes that were too expensive or you can blame the true culprit the banks, builders and our own government. They are the ones who created and allowed loans that were not affordable. They were the ones who created the bubble and built a home worth $100k and sold it for $300k causing all existing homes on the market to triple in value.

At that time if you wanted to buy a home you had the choice of paying for high rent in some crappy apartment or to purchase a new home with a high mortgage. Everyone wanted the white picket fence and the American Dream.

I believe the banks wanted their money back from all the unsecured debt we the people defaulted on and claimed bankruptcy on we never paid back. One way to get a few bucks back was to give us shitty loans, remove the jobs and there went your $20k downpayment.


May 29, 2013 9:41AM
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Housing will be the main driver of the economy as the recovery continues from the bottom of 2009.

In a few places in the country, housing prices and demand are up big time, but for the rest, you'd hardly know that there was any recovery happening. This isn't a bad thing. These areas will slowly recover giving the housing market legs. 

With low interest rates courtesy of Dr Ben, improving job market, and declining UE housing will be rockin' and rollin'. The only thing holding it back is a shortage of labor to build homes and the necessary capital to get things moving again. One big problem is most homes are built by small independent contractors many of whom got wiped out in the bear market!

Another over looked factor is the improving prices of existing homes. Many homeowners would sell and move it they could get out of their mortgages either by breaking even or not losing too much. This will help the supply & demand of homes.

There is a lot of yammering going on about the home flippers. In the past, the banks were mighty free with their money, but this time the speculators are going to have to pony up cash. That will reduce the casino environment of the housing bubble. 

Capitalism is wonderful me mateys!

Har har har!
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