The Radical Run in Residential Construction

We've seen the numbers; they're impossible to miss. Sales of homes are down one minute, then down some more the next. Home prices are likewise falling, making any buyers that are standing on the sidelines extremely skittish about stepping in to buy a falling asset.

The numbers that the major homebuilders have been reporting aren't any different. In fact, they may even seem to be worse than the industry numbers would suggest.

Yet the CAPS tag for residential builders is up more than 30% over the past 30 days. Check out some of these red-hot builder stocks:

Company

Market Cap

30-Day Performance

CAPS Rating
(5 max)

Hovnanian (NYSE: HOV  )

$753 million

76%

*

KB Home (NYSE: KBH  )

$2.6 billion

37%

*

MDC Holdings (NYSE: MDC  )

$2.2 billion

35%

**

Beazer Homes (NYSE: BZH  )

$365 million

32%

*

Meritage Homes (NYSE: MTH  )

$454 million

26%

**

Lennar (NYSE: LEN  )

$3.4 billion

24%

*

Toll Brothers (NYSE: TOL  )

$3.8 billion

21%

*

Data from CAPS and Yahoo! Finance as of Feb. 1.

Judging by the dismal CAPS ratings above, last month's run does not seem to have convinced CAPS players that the builders are a buying opportunity. To get some more color, though, I tuned in to what investors are saying about Hovnanian and Motley Fool Hidden Gems pick MDC Holdings.

Bad and ... not so bad?
It should be clear by the chart above that most investors on CAPS think that housing stocks are a risky proposition right now. Among the maligned housing stocks, Hovnanian falls squarely in the least liked category. Of the 755 investors who have rated the stock, more than 500 think it will underperform the broader market.

CAPS All-Star and outspoken homebuilder critic floridabuilder put a thumbs-down on Hovnanian last month, writing, "Ara Hovnanian ... is enough to red thumb this builder. 20% chance of surviving the downturn." Meanwhile, toshimelonhead was even more direct. He put the thumbs-down on the stock at roughly the same time and commented, "This one's bankrupt, folks. Makes other homebuilders seem OK, which is hard to do."

While it's hardly a highly recommended stock, MDC's bull-to-bear ratio of 2.4 to 1 looks comparatively good. There's no shortage of bears on MDC, but there are a fair number of investors who think the stock is priced too low. CAPS All-Star PrudentiaLP rated MDC an outperformer because of its strong position within the industry, its strong capital position, and its "limited speculative inventory." He also summed up his thoughts:

MDC offers the ability to take advantage of time arbitrage -- buying when the short term outlook is bleak but the long-term outlook is better. Current negative sentiment makes it hard to determine how MDC's stock will do in the short term, but at today's prices it is clearly a bargain over the long term.

I have yet to take the plunge on any builder stocks myself -- in my real portfolio or in CAPS -- though I expect that there are some deals hiding out in the rubble of this beaten-down industry. Some of the better builders like MDC, Toll Brothers, and KB Home will stay on my radar, but with so many cheap stocks right now, I've been finding some great deals without having to resort to bottom fishing.

Have some thoughts of your own on the housing industry? Head over to CAPS and join the 83,000 investors who are already rating thousands of stocks.

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