Home Building Buys

10/08/2004 12:00 am EST

Focus:

John Buckingham

Editor, The Prudent Speculator

John Buckingham focuses on long-term growth and value, and his approach has clearly paid off. His The Prudent Speculator, is rated #1 by The Hulbert Financial Digest for the 10, 15 and 20 years. Here, he looks at one of this favorite sectors – homebuilding.

"The homebuilders have been the ultimate growth stocks over the past five or six years, yet they are priced at their least expensive valuation levels in terms of their earnings. Everyone thinks we are in a housing bubble. Yes, there is significant price appreciation in certain areas that could be called a bubble. But we have never had a national decline in home prices since they started keeping data in the 1950s. We have a shortage of desirable land in this country. We have great family creation and favorable demographic trends. There is really excellent supply and demand characteristics in the industry. Meanwhile, despite perceptions of higher rates, the yield on the 10-year Treasury note – which is the most important rate when it comes to mortgages – has fallen. These rates have fallen to 4% or so, which is historically low. The last time we saw that yield was 1965. The bottom line is that these are great growth stocks trading at incredibly low valuations.

"D.R. Horton (DHI NYSE) has grown earnings and revenues in each of the last 27 years. If I showed investors a chart of the earnings of Horton, and told them that it was a high technology stock, you would likely pay 90 times earnings for it. But if I told you what they did – build houses – you would want to pay 9 times earnings. That’s the amazing thing. These companies have grown at 15%-20% a year since the early 1990s and are projected to grow at 15% a year out through 2008. I continue to like D.R. Horton and have just bought some personally. The stock has gone up some 500% in the past five years, but the p/e hasn’t changed. Today the p/e is about 8, and five years ago it was about 8. What’s changed? The ‘p’ is up 500% because the ‘e’ is up 500%.

"KB Home (KBH NYSE), which is well known in southern California, had earnings out recently and for the 77th consecutive quarter, they beat estimates. And they raised guidance. KB Homes is going to earn $10 a share this year, and they project earning $20 a share in 4 to 5 years. So you are talking about an industry that I believe still has the potential to grow at 10% to 15% a year.

"My favorite homebuilding stock today is Beazer Homes (BZH NYSE). It is trading at about 6 times earnings and growing at 15% a year. I think you will do fine no matter which large, well capitalized builder you buy. If you can get past the fact that they ‘just’ build houses – and don’t make routers or cell phones – I think you will be very happy with these stocks down the road."

Editor’s note: John Buckingham’s investment philosophy also forms the strategy behind the Al Frank Fund (VALUX). In light of his view that dividends will become an ever-more important part of investing going forward, he is about to launch the new Al Frank Dividend Value Fund (VALDX). We wish John and his team the best of luck with this new venture.

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