Guru Investors' Top Homebuilder Stocks as Housing Recovery Begins
The information followed another study in February which showed that these new homes are selling faster, too. New housing inventory in recent months fell to historical lows, and the median number of months a new home sits on the market is 4.6, a 68% decline from their March 2010 highs.
The potentially nascent recovery of the home building market that was decimated in the mortgage crisis of 2008 and 2010 has attracted a number of the investors GuruFocus tracks. The stocks from the home building sector that the most of these investors are currently holding, according to the All-in-One Screener, are: Toll Brothers Inc. (TOL), Lennar Corp. (LEN), PulteGroup Inc. (PHM), Interface Inc. (TILE) and DR Horton Inc. (DHI).
Toll Brothers Inc. (TOL)
Toll Brothers is the most-held stock of the home building sector, with 12 gurus having positions.
Arnold Schneider has by far the largest position. His 1,381,748 shares equal 4.2% of his assets managed. He also more than doubled his stake in the fourth quarter, after selling for four straight quarters while the price went up.
John Keeley, who owns 780,680 shares, has the second-largest position, equal to 0.56% of his assets managed. He has been adding to his stake quarterly since he initiated it in the fourth quarter of 2011.
Two Gurus initiated stakes in the fourth quarter – Bruce Kovner and Ron Baron.
Founded in 1967, Toll Brothers is a luxury home builder with projects in 19 states, and its stock has rallied almost 51% over the past 52 weeks. It trades for $36.36 per share on Wednesday.
Toll Brothers’ financial results for the quarter ended Jan. 31, 2013, included a surge in net income to $4.4 million, or $0.03 per share, from a net loss of $2.8 million, or $0.02 per share in the prior-year quarter. Pre-tax inventory write-downs were also lower, at $0.7 million, from $8.1 million. The company had 746 home building deliveries, for a 32% increase in revenue to $424.6 million, while gross margins increased 0.2% to 23.4%.
In addition to increased demand for its homes, Toll Brothers is seeking to supplement its income by starting new rental apartment and high-quality student housing projects which should begin generating income beginning in fiscal year 2015.
Robert I. Toll, the company’s executive chairman, commented on the housing recovery in its first quarter statement: "After seven years of trepidation, buyers are reentering the housing market and household formations are increasing. With low inventories of houses for sale and a limited supply of approved lots, home prices are rising. Buyers who need to sell one home to move to the next one are more willing and able to make the move. These factors plus record-low interest rates are boosting the housing market's recovery. As housing continues to recover and home prices rise, personal and bank balance sheets get stronger, which should spur additional economic activity and more housing demand."
Toll Brothers has a balance sheet with approximately $1.03 billion in cash at its first fiscal quarter’s end, compared to $854 million in the prior-year quarter. Long-term liabilities and debt also increased to $2.16 billion, from $1.72 billion.
Lennar Corp. (LEN)
Lennar is almost as widely held as Toll Brothers, with 11 gurus claiming positions in it. Of these, the top holder is Ken Heebner, who holds 4.85 million shares, or 4.9% of his assets managed. His most recent activity was adding 790,000 shares in the fourth quarter of 2012. He began the position in the fourth quarter of 2011.
Second to him is John Keeley, with 657,961 shares, or 0.57% of his assets managed. He initiated the position in the third quarter of 2011, added to it quarterly since then and reduced 23,300 shares in the fourth quarter after the price more than doubled from his initial average purchase price.
Keeley commented on his home building positions in his fourth quarter letter, saying:
“At a company specific level, we have been impressed with PulteGroup (PHM), Toll Brothers (TOL) and Lennar (LEN). The swift collapse in demand forced each of these companies to undergo significant restructuring. Like many of our holdings in this low interest rate environment, many companies in this industry have beneficially refinanced a substantial amount of debt and strengthened their capital structures. They have also improved their inventory of homes by liquidating poorly performing holdings, and strengthened the performance of many existing communities. With a leaner structure, reduced costs, and an increase in demand, we continue to believe the industry has substantial upside. Lastly, after a substantial plunge in 2008 and 2009, new home starts are beginning to climb off decade lows, which we believe is a significant catalyst for future gains and momentum. However, despite our long-term enthusiasm for the industry, near-term valuations are stretched at current earnings levels, and we responded by reducing exposure to some positions during the most recent quarter.”
Gurus for whom Lennar was a new buy in the fourth quarter were Stanley Druckenmiller and Steven Cohen, both at marginal sizes. The only one disposing of his position was George Soros.
Founded in 1954, Lennar builds quality homes and affordable retirement homes and provides mortgage financing through its financial services branch. Its stock advanced almost 65% over the past year and trades for $43.78 per share on Wednesday – close to a five-year high.
Lennar released its first quarter 2013 results on Wednesday. The company had increased net earnings of $57.5 million, or $0.26 per diluted share, compared to $15.0 million, or $0.08 per diluted share in the prior-year quarter. Revenue increased 37% to $989.9 million.
Lennar’s new home deliveries also increased 28%, new orders were up 34% and it was able to increase the average price for the homes in its backlog 13% by quarter-end. Gross margins on home sales were up 120 basis points to 22.1%.
Currently, Lennar has a P/E of 12.3, P/B of 2.3 and P/S of 2.21, which is close to a 10-year high.
PulteGroup Inc. (PHM)
Seven gurus are holding PulteGroup, with Ken Heebner and John Keeley again having the largest positions, at 4.2% and 0.74% of their total assets managed, respectively. Ken Heebner amassed a stake of 8.87 million shares in the third and fourth quarters of 2012. John Keeley has been trading the stock since 2009, sharply increasing his in the fourth quarter of 2011. In the past two quarters, he has reduced the position to 1,823,080 shares.
Jim Simons, Ronald Muhlenkamp and Steven Cohen also added to their Pulte holdings in the fourth quarter, while Charles Brandes and Ray Dalio sold shares, and Bruce Kovner sold out.
John Keeley commented on his PulteGroup transactions in his fourth quarter letter:
“PulteGroup Inc. (PHM) was a significant contributor over the past year and was easily the top performing security in the portfolio. The homebuilder climbed over 292 percent over the trailing twelve months and contributed 119 basis points to the portfolio over that time period. The company has been effective at controlling costs and strategically improving many of its existing communities. Despite a number of positive economic reports related to housing, it appears that the rally in the industry is getting very little respect. We continue to see sentiment indexes improving rapidly, tight supply which is creating an attractive supply-demand imbalance, and improvements in pricing. Although we anticipate some volatility during the housing recovery, with interest rates at record lows and the Federal Reserve directly supporting rates with their recent announcement, we continue to expect progress in this area and have positioned the portfolio accordingly with Pulte and a number of other positions with exposure to the housing industry.”
Pulte is one of the nation’s largest home builders with a versatile product offering and brands that include Centex, Pulte Homes and Del Webb. It stock had a 133% run up over the past year to $21.40 per share on Wednesday.
The company announced $59 million, or $0.15 per share, in net income for the quarter ended Dec. 31, 2012, up from $14 million, or $0.04 per share, in the prior-year quarter. The fourth quarter included $49 million in charges for potential future loan repurchase obligations, and $32 million for the repurchase of $496 million of senior notes. The prior-year quarter’s results were affected by $27 million in various charges.
Total revenues increased to $1.57 billion from $1.26 billion, as closing increased 20%, the average selling price rose 6% and new orders increased 27%. Its gross margin improved 320 basis points to 21.8%, and it trimmed costs by 40 basis points in SG&A.
After paying down $600 million in senior notes in the quarter, Pulte had $2.51 billion in long-term liabilities, and no long term debt, compared to $3.09 billion in long-term debt in the prior-year quarter. It boosted its cash position to $1.41 billion, compared to $1.08 billion.
Pulte currently has a P/E of 38.3, P/B of 3.7 and P/S of 1.66, of which all three are close to 10-year highs.
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