Home on the Range

09/10/2004 12:00 am EST

Focus:

Concerns of a "housing bubble" have made the home building sector a contrarian play for years. Yet, stocks in the sector continue to show growth. Here, four leading advisors continue to bet against the "bubble" scenario and offer their top housing plays. (For more on the advisors cited below, click on their photos.)

Spear, Gregory"Pulte Homes (PHM NYSE) has distinguished itself with outstanding relative and absolute performance," says Gregory Spear, editor of The Spear Report . "Pulte is the designated leader of the pack. The company appears to be operating in an excellent market environment, but more importantly, they are managing it in a near-perfect manner. In late July, Pulte announced that net income surged 54% on a 28% revenue pop. Looking under the hood, one finds more amazing data. For starters, they still have pricing power, which is allowing the company to offset higher lumber costs. Gross profit margins increased 1.2 percentage points in the last quarter to 22.1%. Unlike technology companies, which appear to have a great deal of difficulty forecasting demand and managing inventory the housing industry operates like military contractors, with a constant backlog. Changes in backlog are considered significant, and Pulte managed to increase that figure by more than 30% in the last quarter. The big question in relation to housing is whether it is still as cyclical as it used to be. Our answer is definitely 'No!' We like the homebuilding sector at this time and particularly recommend Pulte as a long term buy and hold candidate."

Fried, David"NVR Inc. (NVR AMEX), one of the nation's largest homebuilding and mortgage banking companies, is a new addition to our Buyback Portfolio," says David Fried, editor of The Buyback Letter . "In addition, NVR provides mortgage-related services through its mortgage banking operations in 11 states. It sells substantially all of the mortgage loans it closes in the secondary markets. In 2003, NVRM closed about 10,200 loans worth about $2.4 billion. The company’s recent earnings reports have been notable. In mid-July, NVR announced that second quarter earnings exceeded the year-ago quarter by 36% and net income rose 22%. Total revenues increased 18% for the quarter. In May, the board authorized the repurchase of $200 million of its outstanding common stock, a continuation of the stock repurchase program that began in 1994. During the first six months of 2004, it has repurchased 552,000 shares of its common stock. NVR's aggressive buyback program has led to stock-price appreciation of more than 4,000% over the past decade. In spite of predictions of higher interest rates and a slowing housing market NVR has repurchased over 11% of its stock over the past year."

Alexander, GaryAdds Gary Alexander, editor of SmartMoney Investor Insights , "America’s #1 homebuilder, D.R. Horton (DHI NYSE), remains a bargain. In addition to new and step-up homes for immigrants and young people, many aging, affluent baby boomers are now buying second homes for retirement—becoming snowbirds, like their parents did. Horton recently had an all-time record backlog of over 19,500 homes, worth $5.2 billion. They also reported a 61% growth in both net income and earnings per diluted share over the same quarter in 2003. Net sales orders and homes closed both increased 23%. The stock and its sector remain depressed for two major reasons: Most analysts believe interest rates will rise, and the economy is slowing down, causing slower housing starts. Of course, those two trends are contradictory. If long-term rates rise, it's a sign of a strong economy, and so more people can afford homes. If the reverse is true, then we’ll see mortgage rates decline. I also like Horton due to demographics, as more and more immigrants and young families need homes. The percentage of homeowners who claim immigrant or minority status has risen from 17% in 1980 to about 26% today and will reach an expected 34% by 2020. In my view, D.H. Horton remains a buy."

Oberweis, JamesFinally, Jim Oberweis, editor of The Oberweis Report , offers a housing play, from "south of the border." He explains, "Desarrolladora Homex (HXM NYSE), know as Homex, is a leading vertically-integrated home builder that focuses on providing affordable entry-level and middle income housing in Mexico. The company currently operates in 22 geographically dispersed cities located in markets ranging from major metropolitan areas to medium size cities throughout 16 Mexican states. Homex relies on its own information technology system to integrate all aspects of their operations which allows the company to control costs and provide easily duplicated service. During the firms’ latest reported second quarter housing unit sales totaled 4,093, which represents a 64% increase over the previous year level of 2,496. Also for the second quarter, the firm reported a 104% increase in revenues to approximately $88 million from second quarter 2003 revenue of $43 million. Pre-tax income rose 88% to $244 million from $130 million in the same year-ago period. Note that one ADR represents six ordinary shares of Homex. These shares may be appropriate for risk oriented investors."

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