You're right to point out the weak stragglers of the homebuilding herd, Rick. I won't recommend stocks like Lennar (NYSE: LEN ) , Centex (NYSE: CTX ) , or D.R. Horton (NYSE: DHI ) to anyone, until those firms prove that they can pull off some kind of turnaround. Housing is still a troubled sector, and some of the biggest names are in the deepest trouble.
So housing starts hit a 14-year low last month. Fourteen years -- nearly a decade and a half -- is quite a stretch, isn't it? The last time the American housing market was this cold, I was still in high school, and Sleepless in Seattle was fresh in theaters. Aerosmith was "Cryin'" and "Livin' On the Edge." I bet you hadn't even heard of the Internet yet. Put another way, it was a long time ago.
As bad as the tech-stock crash was, it bottomed out in 2002 after erasing just seven years of gains, stretching back to late 1996. The housing market is on a way colder streak already, and it has to stop somewhere. The population is still growing; the annual U.S. gross domestic product hasn't declined since 1982, except for a minor a blip in 1991; a larger and more affluent population needs to live somewhere; and the old houses do break down eventually. Ergo, there will always be more homes built.
Again, you just need to find builders that stand ready to profit from a rebound, or from stepping in to take the business that the stumblers are dropping. Toll Brothers (NYSE: TOL ) may not have impressed Rick with its share-price movements, but it's still a profitable business with hefty cash flows and a reasonable debt load. NVR (NYSE: NVR ) commands 24% gross margin and a 6.7% net take. Compare that to Horton's negative 31.7% net margin and Pulte's (NYSE: PHM ) negative 25% take, and you start to see where the winners might be hiding.
Could the market get any worse? Of course it could. But that will only shake out more of the underperformers, leaving the real winners in even better positions. So take a chance on a great homebuilder today. The long-term rewards will be worth any short-term pain you might feel along the way.
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