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Dueling Fools: Bullish on Homebuilders

Yeah, you read that right: I'm bullish on homebuilders.

That's kind of like waving a Yankees pennant at Fenway Park, but there it is. It just makes sense when you think about it.

Remember that other bubble that popped seven years ago? Of course you do; the downfall of Yahoo! (Nasdaq: YHOO  ) and Amazon.com (Nasdaq: AMZN  ) and the Nasdaq as a whole was too obvious and deliciously ironic to miss. Anything with "dot-com" in its name got pumped up to ridiculous valuations, and then the whole thing came crashing down all at once.

That's what's happening to the housing market right now. Home prices climbed too close to the sun, followed by insane loan terms designed to let people buy houses they really couldn't afford. The joyride is done, my neighborhood is full of unsold flip-me properties, and homebuilder stocks are going the way of property prices -- down, down, down.

And that's where you'll find some of the most amazing deals you'll ever see on the stock market.

Look back at the tech bubble again. Yes, it hurt to hold stock in the big Y or Amazon back in 2000. But if you bought those stocks when they bottomed out in 2001, you'd be sitting on better than a four-bagger in Yahoo today, and a Lynch-esque 10-bagger in Amazon -- better than a 40% annual return, my friend.

That's the kind of rebound opportunity we're seeing in the housing market today. An entire industry just can't roll over and die, especially one as ingrained into the American economy and culture as homebuilding. And some of these companies are brilliantly run operations that will simply ride out this storm, rising phoenix-like from the ashes in a couple of years.

So the trick is to find the good homebuilders, those that will survive the shakeout and pounce on a less competitive market when the credit crunch is over. Take a look at these candidates, for example:

Company

Market Cap

Price to Tangible Book

Price to Sales

Net Income Margin

Toll Brothers (NYSE:TOL)

$3,471.9

1.0

0.7

5.6%

Homex Development (NYSE:HXM)

$3,241.1

4.7

2.5

11.6%

Ryland Group (NYSE:RYL)

$1,048.1

0.8

0.3

2.5%

Brookfield Homes (NYSE:BHS)

$504.9

1.2

0.6

15.9%

Avatar Holdings (NASDAQ:AVTR)

$394.1

0.7

0.6

20.6%

From Capital IQ as of Oct. 16.

Again, you're not dreaming or hallucinating. You can still find profitable homebuilders whose stocks are priced well below their annual sales or tangible book values. They're household names like Ryland and Toll Brothers, and most of them back up their numbers with strong cash flows, too.

It's just a matter of diving into that pile of excellent value propositions and finding the ones most likely to survive the breakdown. Every crash has a bottom, and while it's tough to call the lowest point with precision, I think we're close enough now to warrant some trash-picking. Right, Rick?

Further Foolishness:


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Anders Bylund
TMFZahrim

Anders Bylund is a Foolish Technology and Entertainment Specialist. Where the two markets intersect, you'll find his wheelhouse. He has been an official Fool since 2006 but a jester all his life.

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