Spear Targets Homebuilders

03/05/2004 12:00 am EST

Focus:

Gregory Spear

Editor and President, The Spear Report

"We believe this is the start of the ‘recognition phase’ of a paradigm shift in homebuilding stocks," says Gregory Spear, editor of The Spear Report."We believe investors will recognize value in these stocks in 2004-2005." Here, he discusses three of his favorites in the sector.

"With favorable demographic trends, advantageous economies of scale, access to cheap capital and numerous acquisition opportunities, we believe our favorite builders are in the very early stages of that paradigm shift. Of course there are risks. But we believe we will see technical signs of any such impending perfect financial storm in the charts long before it is upon us. For now, this is a bull market in that industry, and we want to be a part of it.

"Meritage (MTH NYSE) builds single-family homes ranging from entry-level to semi-custom luxury in Texas, Nevada, Arizona, and California. We like that geographic concentration because as boomers retire they are moving to the sunbelt states. Their revenue and earnings numbers are spectacular. For the full year of 2003, homebuilding revenue was also up 31%. This makes it one of the fastest growers in the group. Meritage stands out technically from most of the other homebuilders as it was recently able to post new all-time highs. 13% of the float is sold short. That is excellent fuel for this advance.

"Hovnanian (HOV NYSE) is a stock market ‘tortoise’. Hovnanian constructs a wide variety of homes and apartments/condominiums for first-time buyers, second-time move-up buyers, luxury buyers, active adult buyers, and empty nesters in 288 new-home communities in 12 states. In early February, the company reported that contracts for new homes rose 46% in the fiscal first quarter to 3,133 homes. Currently, 19% of the float is sold short; that negative bias will provide plenty of fuel for a substantial rally.

"Beazer Homes (BZH NYSE), based in Atlanta, is one of the country's ten largest single-family homebuilders with operations in 40 markets in 19 states. The company emphasizes the South and West, which are the fastest growing areas. Most of the company's homes are designed to appeal to entry-level and first-time homebuyers. Beazer is eager to help you customize your home before it is built and has a staff of designers ready to assist you. This built-to-order feature makes for very predictable growth and facilitates financial planning, avoiding negative earnings surprises due to unsold inventory. For the quarter ended December 31, the company reported a record EPS of $3.41, up 24%. Total revenues were $810 million, up 16%."

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