If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
...and Home Building Buys
12/03/2004 12:00 am EST
John Buckingham boasts the best record in the financial newsletter field. According to The Hulbert Financial Digest, The Prudent Speculator is the top performer for the past 20 years. Here, the advisor offers a trio of recommendations among home builders.
"The housing sector continues to defy the pundits (who have been wrong, year after year) as new home sales rose 3.5% in September to a 1.206 million annual rate, the third-highest tally on record and again topping expectations that called for a modest decline. Analysts were also off on their forecasts for existing home sales, which showed a 3.1% increase to an annual rate of 6.75 million for September. With 30-year rates actually falling to a six-month low of 5.64%, according to Freddie Mac, it looks like the strength in housing will continue.
"Among the home builders, Standard Pacific (SPF NYSE) is especially attractive. One of the nation’s largest homebuilders, with operations in California, Texas, Arizona, Colorado, Florida, and the Carolinas, SPF turned in superb third quarter earnings of $2.16 per share. Quarter-end backlog jumped 51% to a record 6,956 homes, valued at $2.4 billion, and new home orders surged 15% to a record 2,474. As a result, it expects Q4 earnings of $3.65 per share with full year 2004 profits coming in at $8.75. The good times should continue to roll in 2005 with earnings guidance boosted to a range of $9.80 to $10.00 as Standard for the first time ever expects to deliver more homes in a state (Florida) other than California. With a price to earnings ratio of just 7.3, we'd be buyers of this bargain-priced growth stock up to $63.15.
"Meanwhile, the ‘highest priced’ of the dozen or so builders that we have recommended, Beazer Homes (BZH NYSE), remains one of the least expensive. Beazer, which is headquartered in Atlanta, is one of the country's ten largest single-family homebuilders with operations in Arizona, California, Colorado, Delaware, Florida, Georgia, Indiana, Kentucky, Maryland, Mississippi, Nevada, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, and West Virginia. Certainly, the housing sector cannot continue to grow as fast as it has in recent years, but it is our assertion that large, geographically-diversified builders like Beazer will still be able to post handsome growth even if interest rates rise from current historically-low levels.
"Indeed, earlier this month Beazer posted record fiscal 2004 (ended 9/04) earnings of $17.09 per share, up from the fantastic earnings of $12.78 posted in fiscal 2003. With fiscal-year-end backlog standing at 8,456 homes, 13.9% higher than a year ago, and having sales value of $2.24 billion (36% better than in 2003), fiscal 2005 is shaping up as another record year. In fact, the company gave 2005 earnings guidance of $20.00 to $21.00 per share. Although Beazer shares are up 31% in 2005 as I pen this missive, the stock remains extremely inexpensive, trading for just 7.5 trailing-12-month earnings, and we would buy this value-priced growth stock up to $132.00. Our liquidity and fundamental goal prices are presently $264 and $220, respectively.
"Pulte Homes (PHM NYSE) has operations in 45 markets across the US, and under its Del Webb brand is the nation's leading builder of active adult communities for people age 55 and older. The company has constructed over 370,000 homes during its history. Pulte's mortgage division is a nationwide lender committed to meeting the financing needs of its homebuying customers by offering a wide variety of loan products and superior customer service. Results for the fiscal third quarter ended September were a record $1.99 per share. Revenues grew to $2.97 billion from $2.4 billion in the year ago period.
"Selling in October caused the shares fall to the upper 40s on concerns that the Las Vegas market was tanking, and others would follow. Looking ahead, Pulte affirmed its revised guidance of earnings of $7.40 to $7.70 per share for fiscal 2004, and raised guidance for fiscal 2005 to a range of $9.00 to $9.50 per share. With interest rates continuing to be historically low and baby boomers beginning to retire we think PHM is the right stock in the right place at the right time. It trades for just six times the low end of expected 2005 earnings and less than two times book value. Its also selling for more than 10% below its recent highs. Our liquidity goal is $115 and fundamental goal is $95 and we are buyers of PHM up to $57.60."
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