Homebuilder Stock Favorites with Data

This week I have taken a closer look at the valuation metrics for a dozen large publicly traded home building companies with a goal of identifying attractive investment opportunities to play the likelihood of a rebound in new housing starts over the next few years. As a value investor, I looked mainly at valuation data rather than fundamentals for each individual company. For the most part these stocks trade together as a group, so I am trying to find ones I think could outperform the sector based on a lower entry point price relative to the rest. The fundamental backdrop (i.e. housing market conditions) are likely going to impact them all in a similar fashion.

Below you will find a summary of the 12 stocks I looked at. I created my own screening criteria to weed out smaller companies, those with above-average debt levels, as well as those that, for some reason or another, have a valuation metric that is meaningfully above the rest of the group.

The four stocks highlighted in yellow are the ones that fit my criteria and therefore are the companies I am going to focus on for this investment thesis. The black boxes indicate a data point that eliminated a certain company from contention. Not all of the black boxes indicate bad metrics. In fact, they include market values below $1 billion (which itself is not a negative) as well as one outlier metric that actually indicates company strength (NVR trades at a premium to the group on a price to book basis because it has the strongest balance sheet). This does not mean NVR is a bad investment, but I eliminated it because I am not getting enough value in the market because investors have already identified NVR as being in a strong financial position. I did eliminate stocks with a high proportion of debt relative to cash and investment holdings, so that was a negative metric that I used.

As you can see, I have identified four home building stocks that appear to have strong valuations relative to the group as a whole. Among these companies there is not much valuation differential, so other factors may play into how I would go about choosing one to invest in for the longer term. As with most of my potential investment candidates, these housing stocks are contrarian ideas. The housing starts data is unlikely to rebound in the short term, so investors looking to play this potential improvement should take a multi-year view of the investment thesis.

Full Disclosure: Peridot Capital had no position in the common stocks of any home builders at the time of writing. However, clients of the firm do currently own positions in the debt securities of Pulte Homes, although positions may change at any time

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2 Thoughts on “Homebuilder Stock Favorites with Data

  1. I’ve been researching the homebuilders over the last week. The data on housing starts/household formation/population growth seems to point to a recovery in housing starts in the mid 2011 to early 2012 time frame. It appears to me that even if the excess supply of vacant units/2nd homes etc was on the high end, the US will have under built by enough units some time next year to remove any supply overhang. And if unemployment recovers, household formation could actually move higher in an economic recovery (to reverse negative formation in the recession), and you could see housing starts above the 1.5mm/year number.

    The real question is how much of it is priced in at these levels… or if the better way to play it is by buying other companies that are levered to the housing market.


  2. Chad Brand on May 11, 2010 at 11:37 AM said:

    I agree that the last point you raised is the key. To me, the fact that the stocks have stabilized for a while tells us that, barring a huge double dip in housing, the stocks likely don’t have much downside from here. The share prices seem to be acknowledging that a rebound will come, but it will be a while (hence the disinterest in most circles). I agree, but don’t mind being early. I would rather be early and deal with dead money for a while then wait for signs of a rebound and pay 25%-50% more for the stocks.

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