CNBC Stock Blog

3 Housing Stocks for a 2012 Rebound

Stockpickr Staff

For investors waiting for the much-anticipated upturn in housing, 270 stands out as a stark reminder. That figure represents the PHLX Housing Sector Index's peak, seen back in early 2006. Six years later, that index stands at just 106.

A 60 percent drop in the index, which represents a basket of major homebuilders, is an even more severe than the 30 percent to 50 percent drops seen in many housing markets. As a result, an investment in home-building stocks has fared even worse than an investment in houses themselves.

Yet the converse is also true. An investment in home-building stocks could prove to be even more profitable than a purchase of a home. Of course you purchase stocks and homes for different reasons, but if you're bullish on a coming housing rebound, then the homebuilders represent your best chance at earning back lost funds.

Is it realistic to expect a housing rebound? Surely. Will that rebound begin 2012? Quite possibly. It all comes down to supply and demand. The supply of new homes has been well below historical trends. Demand for new homes has been even lower. For this long-suffering industry to finally turn up, it's all about demand. And emerging signs are promising.

First, it starts with employment. The U.S. economy created at least 100,000 jobs in each of the last five months of 2011. The monthly figure averaged 130,000 over that span, and economists think that a monthly reading closer to 200,000 per month is a key psychological milestone for consumers to start thinking about committing to major purchases like new homes. We're not there yet, but we're getting closer.

When consumers are ready to plunk down their mortgage, they'll find an ample supply of existing homes for sale. But for those that prefer newly built homes, the inventory is scarce. Here's the math: Roughly 1 million new households are formed every year. (That figure has been lower in recent years as people double up or move back in with their parents.) If the employment picture strengthens, new household formation should rebound.

Meanwhile, the sales trends are finally starting to percolate. New-home sales appear to have bottomed at 290,000 in August, then rose to 306,000, 310,000 and 315,000, in September, October and November, respectively. As a result, the inventory of unsold new homes now stands at 158,000. That's the lowest figure since March 2006.

For homebuilders, any further drop in inventories may mean it's time to get busy and start ramping up construction activity. Rising animal spirits in the housing sector, which have been long anticipated, may soon be at hand. And that PHLX Housing Sector Index may finally start to march upward.

1. Toll Brothers

Although low- and middle-income households remain financially stressed, upper-income households appear to have weathered the downturn in stronger fashion. You can see that in the recent results for Toll Brothers, which focuses on the premium end of the market. The company's fiscal fourth quarter profits, which were released in early December, nearly doubled the consensus forecast.

On a full-year basis, the company earned 24 cents a share, which is fairly unimpressive, but at least Toll is profitable and not losing money in a still-lousy economic environment. Looking ahead, Toll looks positioned to grow market share as management has aggressively been acquiring property while rivals have been in retreat. "Toll is likely to see significantly less competition in the early years of the housing recovery and is well positioned to take advantage of the same given its strong balance sheet," note analysts at Goldman Sachs.

Wall Street expects Toll Brothers to boost sales in the 10 percent-to-15 percentrange in fiscal (October) 2012, and a further 15 percent to 20 percent in fiscal 2013. Those assumptions bake in further modest declines in housing prices. If housing prices stabilize, then that forecast could prove shy. Equally important, earnings per share look set to grow at least 50 percent in fiscal 2012 and 2013, and by 2014, Toll may again be earning well more than $1 a share. As a point of reference, the home builder earned more than $4 a share each year in the middle of the last decade.

At a recent $22, shares looks reasonably priced ahead of a possible robust profit rebound.

2. MDC Holdings

MDC Holdings may be the safest stock in the sector, simply because its market value of $860 million is below the conservatively assessed $880 million value of its real-estate holdings. That is to say, it's trading below book value. That book value has been serially written down to reflect ever-weakening real estate prices, but would be written back up when housing prices start to rebound.

Equally important, MDC "has the best balance sheet in our coverage universe by far," note analysts at Citigroup. With more than $1.1 billion in cash in the bank, the company will be able to snap up choice new properties for development at a faster pace than rivals.

The cash-rich balance sheet enables MDC to support its solid dividend, which currently yields an impressive 5.7 percent, making MDC one of the top-yielding materials and construction stocks. The $1-a-share dividend has been in place for six years and isn't likely to be cut — even if the housing slump continues through 2012.

3. PulteGroup

PulteGroup may post the most impressive operational rebound simply because its results over the last few years have been so lame. Management ran a fairly loose ship, letting costs spiral out of control on a number of development projects. Not anymore. Third-quarter results showed much greater cost discipline. For example, in the most recent quarter, overhead expenses amounted to less than 11 percent of sales, down from roughly 14 percent in the year-earlier period.

As a result, Pulte is expected to swing from an EBITDA loss of $151 million in 2010 to an EBITDA profit of around $90 million this year. That solid bottom-line result comes in a year when sales likely fell around 10 percent — and would have been more impressive had sales been stable. Looking ahead to the current year, sales are expected to rise around 5 percent to around $4.2 billion but could move up closer to 10 percent if the housing market starts to finally reverse course in coming months.

Even without a substantial housing upturn, analysts expect Pulte to boost EBITDA to around $200 million this year and to around $300 million in 2013. This stock once traded near $50 back in 2006 and can now be had under $7. A slowly rebounding housing market should help shares to start working their way back higher.

Additional News: Beaten Down Housing Stocks See Light at Tunnel's End

Additional Views: Pros Pick 'Fixer Uppers' on Homebuilders' Surge


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