Sometimes I question whether the equities markets are creations of intelligent life, or perhaps whether I am. In the middle of last week, during a brief, sunny respite from housing's pounding storms of recent weeks, some investors took a surprising plunge and launched buying efforts directed at the homebuilders.
The buying spree, which affected virtually all builders, including Toll Brothers (NYSE: TOL), Beazer (NYSE: BZH), Centex (NYSE: CTX), and Lennar (NYSE: LEN), pushed the company's prices higher by anywhere from 4.5% to more than 25% on the day. It was ignited by a few positive comments by Toll CEO Bob Toll as part of his company's July quarter pre-release. But perhaps even more surprising than the spree was that, at week's end (and despite brutal market Thursday), the gains in the builders' shares hadn't all evaporated.
It'll clearly take a while before we know whether builders' bleeding has really begun to slow. But just as clearly, there's a significant group of investors itching to launch themselves into the sector. If you fall into that group, I suggest strongly that -- when the all-clear for homebuilding has been sounded loudly -- you take a look at the shares of Inside Value recommendation and Dallas-based Builders FirstSource (Nasdaq: BLDR).
For all intents and purposes, Builders FirstSource is a homebuilding company. True, it isn't buying land -- definitely a factor to like these days -- or erecting homes that it must sell to first-time, or move-up, or luxury buyers. But since it does supply components and materials to those who are, the company is very much in the builders' chain.
Late last month, in assessing Builders' second quarter results, my Foolish colleague Tim Otte noted that, while the company had taken it on the chin from an earnings perspective, its balance sheet and cash flow statement remained solid. He also lauded management for developing a sensible strategy for weathering the housing downturn and then sticking tenaciously to it. As a result, and despite the trying conditions in the sector, the company's operating cash flow was up by almost 25% in the quarter.
In the interest of full disclosure, I must confess to having written the company's annual report last year, so I'm compelled to echo Tim's positive feelings about the company's quality management team. I've never found a way to quantify managerial competence, but I do believe that the Builders FirstSource team -- under the leadership of CEO Floyd Sherman -- is a deep and knowledgeable lot indeed. Further, their efforts are enhanced by the strength of the company's markets, which are concentrated in the Southeast and Texas.
So if you're among those who can't be dissuaded from grabbing housing or housing-related stocks, my thinking is that over time, you probably can't improve upon the opportunity provided by Builders FirstSource.
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Fool contributor David Lee Smith doesn't own a single share in any of the companies mentioned. He welcomes your comments. The Motley Fool has a disclosure policy.
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