The outlook for home builders is miserable, so it's time to buy these beaten-down issues before others sniff a recovery. Here are five of the best stocks . . . in an industry that actually has a lot going for it.
By Jon Markman
Just when it appears the outlook for real estate could not possibly get worse, out comes a report showing that it is. Last week, we learned home prices are sinking in hot spots like Florida at the greatest rate in 25 years. On Monday, we learned pending home sales nationwide are down 13% from a year ago. On Tuesday, we learned that mortgage borrowers are defaulting at rates not seen in decades -- and a major luxury home builder reported earnings down 40% amid a stunning wave of construction cancellations.
It's enough to make you think that the sky is falling, the earth is melting, our biggest investment is rotting below our feet and we're all going to have to crawl into heavily discounted caves to live out shabby, depressed lives on food stamps.
Unless, of course, you are invested in the stocks of the companies that build homes, rather than in the homes themselves. In the perverse, circus-mirror world of Wall Street, the time to buy companies is when it seems business is terrible and will never improve. Like now.
Check it out: Just as home builders were reporting second-quarter results over the summer that were bad and getting worse, their stocks were bottoming and turning the corner. Shares of most of the major builders, such as KB Homes (KBH, news, msgs) and Centex (CTX, news, msgs), are up 20% to 30% since Aug. 1, still have a great head of steam and are bloody cheap. When Toll Bros. (TOL, news, msgs) reported a terrible third quarter Tuesday, the stock rose 3%.
Not too late to buy
In a July 26 column titled "Your Christmas-comes-early portfolio," I urged you to buy the builders on the premise that 17 straight interest-rate increases by the Federal Reserve had led investors to become overly pessimistic on their prospects. Higher rates had smashed their shares to levels previously seen only during recessions, which we were not experiencing.