Homebuilding Buys

11/15/2002 12:00 am EST

Focus:

Louis Navellier

Editor, Blue Chip Growth and Emerging Growth

Two of the very smartest stock pickers around are Louis Navellier and Nancy Zambell. And both are currently recommending stocks in the housing sector. Importantly, however, both emphasize the importance of selectivity in this market: only certain housing stocks are poised to benefit from the current environment. Here are their latest buys.

"I only plan to buy stocks that are truly spectacular in their own right," says Louis Navellier, editor of MPT Review. "An investor’s best defense in an uncertain environment remains a strong offense. The fact that the average stock in my Model Portfolios has posted over 114% earnings growth during the past year and is trading at less than 17 times forecasted earnings is great insurance that they should perform well even if the overall stock market falters. If the average stock in my Model Portfolios expanded to match the p/e ratio of the S&P 500, my portfolios would appreciate approximately 100%. The latest addition to my portfolio is a homebuilder.

"Although many housing markets throughout the US are having problems, the problem lies with expensive homes, not the inexpensive tract home builders that we are recommending. Hovnanian Enterprises (HOV NYSE) recently reported a 94% increase in net new home orders. Currently, housing starts are at record levels, and I expect that many housing markets will become overbuilt, such as Atlanta, Denver, Houston, Salt Lake City, Phoenix, and other areas that promote rapid development. As a result, I only want to emphasize homebuilders like Hovnanian that currently have firm orders and a large backlog, so their future profits will be very predictable."

Says Nancy Zambell, editor of UnTapped Opportunities, "The housing boom that began in the late 1990s is showing no signs of abating. The reason: once-in-a-lifetime low mortgage interest rates. Our latest buy recommendation is not a traditional homebuilder. Clayton Homes (CMH NYSE) is the third-largest manufactured home builder in the US, and the most profitable one. Incorporated in 1968, Clayton has survived many economic cycles. While its competition comes and goes, the company’s vertical integration helps insulate it from the woes that often befall its peers.

"The firm manufactures low-to-medium-priced single- and multi-sectioned homes. The average price is $46,500 compared to $207,000 for a traditional site-built home. With its 20 manufacturing plants cranking out more than 500 floor plans, Clayton has a home for almost any taste and budget, including the company’s first two-story home. Its homes are sold in 33 states through 970 retailers.

"In my opinion, the stock is undervalued, trading at a p/e of just 11.9 – less than half that of its peers. And the stock is undiscovered. Although institutional buying is strong and edging up, just a couple of analysts follow this stock. I recommend that you buy this stock at prices up to $13 a share. Should the shares go higher before you have the chance to buy, I would wait for the stock to settle back in price to under our $13 limit."

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