Turnaround expert George Putnam believes the pullback in homebuilding stocks is creating a buying opportunity; here, he looks at three ways to play the sector.
Steve Halpern: We're here today with George Putnam, editor of the Turnaround Letter. How are you doing, George?
George Putnam: Fine. Thanks, Steven.
Steve Halpern: You've been extremely successful over the past year with your call for a turnaround in the mortgage market. In fact, you had the top-performing stock in our annual survey, done in January. Are you still bullish on the mortgage stocks?
George Putnam: Yes we are, particularly the mortgage insurers. They were the most beat-up, and as a result, they've been bouncing back the fastest.
Steve Halpern: In your latest issue of the Turnaround Letter, you note that homebuilding stocks have pulled back to levels below where they were in early 2010, yet, at the same time, the housing market's been improving. Could you explain what accounts for that?
George Putnam: Well, I felt that the homebuilders were well ahead of themselves before, and now, people, I guess they're concerned about rising mortgage rates, which will put a bit of a crimp in the homebuilding market, but rates, by historical standards, are still very low.
And there's a huge amount of demand that has built-up over the last several years, and the rate of new homes being built is still way below long-term averages.
So I think there are amounts of upside in the homebuilding business, and with the stocks at these lower prices, I think they look better than they have for a long time.
Steve Halpern: When accessing the homebuilding stocks in general, you've suggested focusing on large geographically diverse builders, could you expand on that?
George Putnam: Yes, well, these smaller builders are still having a hard time raising financing to support their businesses, but the bigger companies don't have that problem, and different markets will be hot at different times, so it's good to buy stocks of the builders that have exposure to at least several different markets.
Steve Halpern: You have an exception to that rule, you look at a smaller home builder, M/I Homes (MHO), and you like that. Could you tell us why.
George Putnam: Well, it's smaller compared to the other large exchange-traded homebuilders, but it's still very sizeable, and it's still in a number of different markets.
I think they're in something like 12 or 13 different markets, spread around the country, and in most of the markets where they are, they're one of the top five builders in that market, and we like it because the valuation's a little bit lower.
It's trading at a lower multiple to expected earnings and to expected cash flow.
Steve Halpern: One of the large builders that you point to is Lennar (LEN). Is that an opportunity for investors?
George Putnam: I think it is. I think they're kind of the high-quality name in the field. They held up better when the industry was hurt a few years ago, and they bounced back pretty strongly, but the stock is off quite a lot over the last few months, so I think they will be the leader going forward, and I think that's a good stock to own.
Steve Halpern: Now, another company that you talk about is Toll Brothers (TOL), which focuses on the higher-end of the home market, as well as condominiums. Do you think there's still opportunity with TOL?
George Putnam: I think TOL is also something worth owning. The high-end has not hit as hard, and so it didn't go quite as low as some of the others.
But, I think it's bouncing back nicely and will continue to do well, and the high-end market is somewhat less sensitive to rates, so even if mortgage rates go higher, I think they will do fine.
Steve Halpern: Well, we really appreciate you joining us today, and thanks for your insights on the turnaround market.
George Putnam: Thanks for having me, Steven.