Catch the Housing Rebound Before Its Too Late
Savvy investors began buying homebuilder stocks when everything about their earnings smelled. No one was buying new homes, banks weren't lending and there was concern that some of these companies might go under. Contrarians, though, gave it a shot and have been handsomely rewarded. In the last year, Toll Brothers (TOL) is up 47%, Ryland Homes (RYL) has gained 87% and KB Homes (KBH) has advanced 51%, to name just a few homebuilders enjoying improved numbers.
The latest U.S. economic data showed that existing home sales rose in the second half of 2012 lifting the year to its best total since 2009. The only region that registered a sales decline was the West and that was due to inventory constraints, said RDQ Economist John Ryding. The supply of existing home sales in January hit its lowest level since March 2005, he added. The big picture, therefore, is encouraging: home prices have increased 12% over the past year.
So, if investors are now finally comfortable that the upturn in housing prices portends a genuine recovery rather than just a head fake, have they lost the chance by waiting too long? The established homebuilder names may already have made their big moves, so investors need to look for names that institutional fund managers have overlooked.
TRI Pointe Homes (TPH) is a good example. The Irvine, California-based homebuilder went public Jan. 31 and has gained 5.8%. TRI Pointe mostly builds in California, which was ground zero for toxic mortgage companies like Countrywide Financial and IndyMac. It may seem difficult to believe that Californians are back to buying newly-built homes, but TRI Pointe successfully sold its Sagebluff housing development in Riverside CA and built 100 homes in its first year of business. TRI Pointe has said it plans to start its first development in Colorado in the spring. At present, the company owns 13 communities, 8 of which are actively selling. TRI Pointe wrote in its prospectus, "Growth in sales of new homes have outpaced growth in sales of existing homes over the same period, increasing 23% versus 8% for existing homes."
Additionally, the executives at TRI Pointe have worked together for over 20 years, so these aren't flippers or teachers turned homebuilders. Chairman Barry Sternlicht, who heads Starwood Capital Group is also the CEO of Starwood (STWD) . The company has attracted coverage from as many as three analysts which is far fewer than Toll Brothers with at least 21 analysts covering that company. In other words, TRI Pointe may be relatively unknown among retail investors. Institutional ownership is at 45%. Follow the smart money.