Homebuilding Buys

09/11/2002 12:00 am EST

Focus:

Louis Navellier

Editor, Blue Chip Growth and Emerging Growth

Few investment advisors have been as consistently successful over many years as Louis Navellier, editor of the MPT Review. Through a proprietary system based on modern portfolio theory, the advisor isolates stocks which show strong momentum relative to other issues. Among his latest favorites are two small-cap housing stocks.

"The strength behind consumer confidence remains in the residential real estate market and the low-interest-rate environment, which tends to boost property prices. But will the bull market in housing soon fall prey to the bear that's terrorizing the rest of the market? There are three big threats to consider.

The biggest threat is rising property taxes. High property taxes in some communities, such as Houston, San Francisco, and Palm Beach County, are taking their toll on high-priced homes. The second threat is potential overbuilding. It's important to find homebuilders that are still reporting tight inventories and have operations in markets that have not yet reached such levels of overbuilding. The third threat is the high-debt levels of consumers. So, investors hoping to ride the final wave of the real estate boom must stay away from homebuilders that predominantly build expensive homes in already crowded markets. We want to focus on stocks that provide low-to-moderately priced homes--homes that the average homebuyer could still afford even if interest rates rise.  

If you want to ride the next wave of the real estate boom, you must find stocks that are avoiding these threats. My top homebuilding stocks, NVR (NVR ASE) and Ryland Group (RYL NYSE)will buck the negative trends and ride the real estate bull market for a good deal longer. Both NVR and Ryland specialize in affordably priced homes, mostly for first- or second-time homebuyers. Both companies are benefiting from the exodus from the high-priced real estate markets, yet both have a strong presence in ‘hot’ markets that still have tight inventories of new homes and rising home prices. NVR, in particular, is doing very well in Washington, DC--easily one of the fastest-growing (and recession-proof) housing markets in the country.

Both of these stocks continue to report record profits gains, despite trading at very low p/e ratios. Last quarter, Ryland reported a 32% gain in earnings-per-share, and NVR reported a 46% increase. I remain extremely bullish on their sector of the homebuilding industry, and they remain two of my favorite stocks. Both have launched large stock buyback programs since their stock prices remain so undervalued. If you want to make a play in the final boom in real estate, NVR and Ryland are two stocks with tremendous upside and none of the risks other homebuilders will face. In my opinion, these stocks offer an incredible opportunity for savvy investors.”

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