Housing Bubble? Not from This Duo

05/16/2003 12:00 am EST

Focus:

Jamie Dlugosch

Editor, The Rational Investor

"The doom and gloom crowd have been predicting the end of the housing boom for some time and yet the housing market continues to grow," says James Dlugosch, editor of The Rational Investor. Adds John Buckingham, editor of The Prudent Speculator, "Despite the tremendous earnings growth enjoyed by the major homebuilders over the last eight to ten years, the stocks remain incredibly cheap, trading for single-digit p/e ratios." Here the two advisors select their favorites.

" Toll Brothers (TOL NYSE) and KB Home (KBH NYSE) have grown, yet the shares still trade for a low multiple of earnings," says James Dlugosch . " Toll, as recently as last year, traded for above $30 per share. With earnings growing in double digits and a recently announced stock buyback, I expect Toll to exceed that level in the next one-to-two years. I would be a buyer of TOL at prices below $20 per share with a price target of $40. The impact of a 'pending' collapse has taken the industry's p/e to 6.5 - down from a level of ten in 2002. Building permits are still growing and with the long period from permit to sale, companies in the sector are poised to continue their impressive earnings growth for the next 12-18 months. In the first quarter, KB Homes reported a 32% increase in earnings with a 20% growth in revenues. With a record backlog, the company has a solid base for future earnings growth. In early April, the company declared a quarterly dividend making the shares even more attractive. The sky is falling story of short sellers seems to always be, 'wait until next quarter.' I'll keep waiting until shares are more fairly valued somewhere north of $60 per share."

Adds John Buckingham, "For those who think there is a housing bubble, we offer this tidbit from the National Association of Realtors: US housing affordability rose to its highest level since 1973. The current reading means that a family with a national median income makes 44% more than is needed to buy a median-priced home.  We maintain three homebuilding stocks on our recommended buy list - Beazer Homes (BZH NYSE), D.R. Horton (DHI NYSE), and Standard Pacific (SPF NYSE).  Horton reported a 44% increase in net income and diluted earnings of $0.86 a share for its fiscal second quarter, ending March. In addition, Horton's record $3.5 billion backlog has allowed the company to raise its full fiscal year earnings forecast to a range of $3.60-$3.65 a share.  Meanwhile, Beazer reiterated its full year 2003 (ends 9/03) profit forecast of $12.25 per share after reporting net income of $2.83 in the second fiscal quarter. Finally, Standard Pacific, which recently announced record first quarter backlog and hiked full year 2003 (ending 12/03) earnings per share guidance to $4.65-$4.75, remains a favorite holding.  We rate Beazer Homes a buy up to $74.49, Horton a buy up to $25.59, and Standard Pacific a buy up to $30.98."

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