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Opportunity in Homebuilder Stocks?

Posted by: Toddi Gutner on May 8, 2006

Here’s a stock tip.

Check out the homebuilder stocks. Why? Let me explain:

Last week, Mara Der Hovanesian authored Handicapping the LBO Stakes which created a list of stocks that may appeal to groups of private equity investors flush with cash and looking for deals. The main targets were those “companies with flat stock prices, low earnings valuations and heavy debt,” she wrote. What I found so striking is that nearly every major housing stock is on the list: D.R. Horton; Pulte Homes; Lennar; KB Home and Toll Brothers.

Savvy investors know that if they’re lucky enough to own stock in a company that is being pursued, they can make handsome gains. While no one can say with certainty what companies will be acquired, this list might help.

In this week’s issue, I did a Q&A with Michael Youngblood, the managing director of Friedman Billings Ramsey & Co. His recent research forecasts housing prices in 379 metropolitan statistical areas and shows that the greatest housing appreciation will be coming in the so-called bubble markets. Though he admits he isn’t a stockpicker, he suggests that investors not shy away from homebuilder stocks. Even those companies that operate in bubble markets may still be good buying opportunities.

Given the possibility of a leveraged buyout and the opportunity for some appreciation in these homebuilding stocks, it’s worth taking the time to dig a bit further.

Reader Comments


May 9, 2006 9:06 AM

While I agree with the contrarian strategy and buying value, I have a feeling these homebuilders are going to have a few quarters of missed earnings estimates and warnings. The slowdown in housing has to catch up with these guys regardless of incentives or buyer programs they put in place. Perhaps these stocks are discounted now because of the pain that is expected to come.

Dont forget, if they do warn and revise guidance lower, than all of a sudden that low P/E of today becomes more justified and actually rises as earnings came in below estimates.


May 12, 2006 8:46 AM

I have a question about Pulte Home's involvement with Ave Maria Town. While Tom Monahan, the Dominos Pizza founder behind Ave Maria Town has assured everyone that the project isn't for Catholics, what is going on with Ave Maria School of Law?


July 30, 2006 5:19 AM

The thought of buying a homebuilding stock right now sounds ominously familiar to cheerleading techs in 2001..."How much worse can it get?" from the infamous "this time it is different." only 1 year before.


August 19, 2007 11:44 PM

I have to agree with homebuilder stocks, although the ones you pointed out do not have great low prices when comparing it over the last 10 years. I look at the housing industry over this time period. If I invest in homebuilders it is going to be a long term investment. I also will not be expecting the stock to just bounce right back, if anything it may go lower and I will just continue buying more at a discount. Even with tech stocks, capital spending will come back and have their strong years. I expect that we will be at least 3-4 years away from a good upswing in the housing market and this is giving the housing market some slack, 5-8 years would be another strong market if you ask me!


April 15, 2008 11:17 AM

some areas will see a good market soon especially retirement areas baby boomers retiring and canadian dollar stronger

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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