November 26, 2007

Home Builders as a Value Idea

MarketBeat Blog - : A Mea Culpa on Home Builders: ""

The Home Builders have been suffering during the housing slump. I do not usually consider price drops as value opportunity but there are several reason that may be interesting now:

  1. Most star analysts have thrown in the towel on the recovery in this sector, read wall street journal post above. most analysts have hold recommendation and the more cowardly "sector perform" rating on the majority of these businesses.

  2. Financial media have stopped reporting on home builders problems or speculating on a turn around.

  3. real estate have predictable cycle to it of depression, gradual recovery, boom, and down turn. We are moving through the process of filtering the excess and removing the speculative element in this sector.
These elements remove all the expectations of quick profit and takes it out of this sector. In turn it makes for some opportunities to be had. But first lets review a basic element of real estate cycles.

A typical real estate cycle is illustrated in the chart below.

I can argue that we are some where in late phase 4 or in early phase 1. I am not going to try to call where we are or how long these phases going to last; that is irrelevant. I know the industry is cyclical and eventually thing will get turn around. But this is the time to look for that business, which will prevail from phase 4 intact and in good position to take advantage of the recovery.

You need to look for a company that is not saddled with a lot of debt, does not have a lot of land on its books, have operations in markets where prices have held and demand is still relatively good, as real estate is local. Also you need to find a company that builds closer to large urban centres as migration towards larger cities is increasing.

These are some of the characteristics the I will be looking for, in addition to sound management and good economics. I am not saying that an investment now is wise but looking and doing some homework is needed. I will run some screens and begin my research, once I find something interesting I will report about it here.

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