People will always need a place to call home. Indeed, housing has been a hot topic of discussion lately. The consensus goes something like this: The Fed is raising rates which will render mortgages expensive for consumers. Cracks are beginning to show in the foundation as orders for new homes are on the decline and new home sales are hitting their lowest levels in recent years. Of course, this is supposed to spell doom for homebuilders such as Pulte Homes (NYSE: PHM) and Centex (NYSE: CTX).
Wall Street's reaction has been swift and punishing. Homebuilders stocks have retreated from their highs and are trading at extremely low P/E ratios by historical standards. In fact, the hombuilders have the lowest P/E of any major industry sector on the stock market (Dreman anyone?!). On a forward P/E basis, the leading companies are trading at a 2 to 3 times discount to the S&P 500. But people forget that these companies have been around for decades and have been through many cycles. That experience has served them well as they have transformed their businesses into conservatively capitalized enterprises, managing cash while focusing on shareholder returns. Just look at the return on equity they are delivering. They don't own excess land and are dominant enough to drive a wave of consolidation through the sector should things go awry and the smaller rivals begin to falter.
Don't forget that the Fed should be close to ending its string of rate hikes. That should lessen the severity of the gloom and doom scenario predicted by naysayers who believe higher rates will destroy the consumers' appetite for homes. Meanwhile, the economy seems resilient and wages are on the rise giving the consumer enhanced buying power. Sure, the housing market in some markets is frothy to say the least and homebuilders themselves admit as much. But a softening market or a gradual leveling out is the more likely scenario than a severe crash.
It is practically impossible to call a bottom on a stock. Pulte and Centex are the two largest homebuilders by revenue and are both repurchasing shares. Their book value (which is a conservative estimate of the liquidation value for these companies) puts a nice support under the shares. I think the downside is manageable while there could be a 25% to 35% upside in the shares.
Wall Street's reaction has been swift and punishing. Homebuilders stocks have retreated from their highs and are trading at extremely low P/E ratios by historical standards. In fact, the hombuilders have the lowest P/E of any major industry sector on the stock market (Dreman anyone?!). On a forward P/E basis, the leading companies are trading at a 2 to 3 times discount to the S&P 500. But people forget that these companies have been around for decades and have been through many cycles. That experience has served them well as they have transformed their businesses into conservatively capitalized enterprises, managing cash while focusing on shareholder returns. Just look at the return on equity they are delivering. They don't own excess land and are dominant enough to drive a wave of consolidation through the sector should things go awry and the smaller rivals begin to falter.
Don't forget that the Fed should be close to ending its string of rate hikes. That should lessen the severity of the gloom and doom scenario predicted by naysayers who believe higher rates will destroy the consumers' appetite for homes. Meanwhile, the economy seems resilient and wages are on the rise giving the consumer enhanced buying power. Sure, the housing market in some markets is frothy to say the least and homebuilders themselves admit as much. But a softening market or a gradual leveling out is the more likely scenario than a severe crash.
It is practically impossible to call a bottom on a stock. Pulte and Centex are the two largest homebuilders by revenue and are both repurchasing shares. Their book value (which is a conservative estimate of the liquidation value for these companies) puts a nice support under the shares. I think the downside is manageable while there could be a 25% to 35% upside in the shares.
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