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.)
"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."
"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."
Adds 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."
Finally, 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."
