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Homebuilders are now trading at attractive prices, many at or below 1x Book Value. I have studied historical prices for many of them, going back 10 years, and you could always make money within a year or so if you bought a homebuilder at or below 1x Book. Many of them have traded as high as 2.5x Book, so the potential for long-term appreciation is excellent.
I hold various Homebuilders in my personal portfolio, with a fair size loss to date. I elected to disregard an article I read in Barron's dated 8/21/2006, which cites Larry Jeddeloh, chief investment officer at money manager TIS Group, as follows: "Jeddeloh says he won't be convinced that the stocks have bottomed until they're at 80% of book.."
I saved the article and just looked at it again as I was going over my thinking on the Homebuilders. A nice call, in retrospect.
Yesterday there was an article in the WSJ, citing Homebuilder "horrors." Today's article says investors may want to "shun" them. Today's new home sales came in worse than expected, the initial reaction was slightly positive. I think we are getting near a bottom now.
All homebuilders have debt and debt is difficult to repay when business conditions deteriorate, creating risk.. On the other hand, some homebuilders have generous lines of credit, negotiated in happier times. From a cash flow perspective, most homebuilder have several years supply of land and don't have to replace each lot they sell. This means they can generate cash by reducing inventory.
Without going crazy trying to do "what if" analysis on their financials, I decided to add a selection of homebuilders to my SLO portfolio, sticking with the ones I am familiar with.
Maximum combined position size would total 20% of my portfolio, so starting at 40% of that I bought 80,000 worth, spreading it evenly among my five picks. I can add to the positions if they move against me. I used market orders and paid an average .70 X book.
600 CTX at 25.94
1,200 PHM at 13.51
700 KBH at 24.30
800 TOL at 19.86
800 RYL at 20.99
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