This week I have taken a closer look at the valuation metrics for a dozen large publicly traded home building companies with a goal of identifying attractive investment opportunities to play the likelihood of a rebound in new housing starts over the next few years. As a value investor, I looked mainly at valuation data rather than fundamentals for each individual company. For the most part these stocks trade together as a group, so I am trying to find ones I think could outperform the sector based on a lower entry point price relative to the rest. The fundamental backdrop (i.e. housing market conditions) are likely going to impact them all in a similar fashion.
Below you will find a summary of the 12 stocks I looked at. I created my own screening criteria to weed out smaller companies, those with above-average debt levels, as well as those that, for some reason or another, have a valuation metric that is meaningfully above the rest of the group.
The four stocks highlighted in yellow are the ones that fit my criteria and therefore are the companies I am going to focus on for this investment thesis. The black boxes indicate a data point that eliminated a certain company from contention. Not all of the black boxes indicate bad metrics. In fact, they include market values below $1 billion (which itself is not a negative) as well as one outlier metric that actually indicates company strength (NVR trades at a premium to the group on a price to book basis because it has the strongest balance sheet). This does not mean NVR is a bad investment, but I eliminated it because I am not getting enough value in the market because investors have already identified NVR as being in a strong financial position. I did eliminate stocks with a high proportion of debt relative to cash and investment holdings, so that was a negative metric that I used.
As you can see, I have identified four home building stocks that appear to have strong valuations relative to the group as a whole. Among these companies there is not much valuation differential, so other factors may play into how I would go about choosing one to invest in for the longer term. As with most of my potential investment candidates, these housing stocks are contrarian ideas. The housing starts data is unlikely to rebound in the short term, so investors looking to play this potential improvement should take a multi-year view of the investment thesis.
Full Disclosure: Peridot Capital had no position in the common stocks of any home builders at the time of writing. However, clients of the firm do currently own positions in the debt securities of Pulte Homes, although positions may change at any time