A couple of weeks ago, I suited up in my best advice-giving paraphenalia and urged Foolish investors to wait a little longer before buying stock in homebuilders. But as I survey the landscape in which these builders ply their trade, that guidance is becoming progressively more difficult to sustain.
You'll recall that the October building numbers were a disaster. Housing starts fell 15% from September, to a seasonally adjusted rate of 1.49 million units. From October 2005, the decline was 27.4%. At the same time, permits dropped by 6.3% to a seasonally adjusted annual rate of 1.54 million, 28% below October 2005.
But the homebuilders' stocks apparently failed to notice those numbers. In fact, aside from an abbreviated hiccup when the October numbers were released, the share prices of most of the companies (whose primary purpose is to build houses) have done very nicely, thank you. And with a proper genuflection in the direction of buying low and selling high -- along with the notion that the builders have been tested of late by a steady stream of negative news -- we might look ever so briefly at three homebuilding names that could make sensible targets for nibbling by adventurous Fools.
Centex (NYSE:CTX), once the largest of the homebuilders, is a somewhat diversified builder today, with operations in the sort of general construction that results in the erection of major hospitals, city halls (Boston), and a wide range of other major structures. At almost $56 a share, it is still down materially from its early-year high near $80, but well above its July low of $42.90. And while its five-year PEG ratio (the price-to-earnings ratio divided by the expected growth rate) is 1.95, higher than the 1.0 limit that I ideally like to set, its solid management and geographic and product diversity seem to me to make it a potential "nibblee."
Toll Brothers (NYSE:TOL) will report the results of its October quarter tomorrow, and analysts are anticipating per-share earnings to come in at $1.06, down materially from last year's $1.84. But, as by far the highest-end of the production builders, Toll seems to make sense in an environment that may include a slowing economy. And with a PEG ratio of only 0.80, along with a trailing-12-month return on equity of almost 29%, Toll could also be an interesting play for Fools with a somewhat longer than normal investment time horizon.
And then there's Ryland (NYSE:RYL), a major U.S. builder whose share price has declined from $83.15 in January to just $33.86 in July, before recovering to its current level slightly below $54. Ryland's PEG is just 0.69, which is getting to a level for this underused metric that makes me sit up and take notice. And its ratio of enterprise value (essentially all the debt and equity it's taken to fund the company) to EBITDA (earnings before interest, taxes, and depreciation) is just 4.5, compared to, say, 8.1 for Centex.
Before closing, let me note that homebuilding might not yet be out of the woods. But if you're in this game for more than a year at a time, the three names mentioned above might well make money for you.
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Fool contributor David Lee Smith owns shares of Centex, but no other company mentioned. He welcomes your questions or comments. The Fool's disclosure policy has a big back yard to play in.
