3 Homebuilding Value Stock Picks: Pullback Presents Profit Opportunity

by George Putnam, III
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Submitted by Turnaround Letter as part of our contributors program.

I’ve mentioned several times over the past couple of years that I thought the homebuilding stocks were getting ahead of themselves as investors anticipated a rebound in the sector. Ironically, now that there is clear evidence of a residential housing rebound, investors are dumping the homebuilders. Most of the homebuilding stocks have fallen by 25% or more from their peaks in late May or early June and many of them are trading below the levels where they were in early 2010. With the stock prices down and the company fundamentals on sounder footings, I think this may be the time to finally step up and invest in the homebuilders.

Many investors are worried that rising interest rates will sharply reduce the demand for new homes. I won’t argue that higher rates have an effect on demand, but we expect the impact to be small. Mortgage rates are still at very low levels by historical standards and likely to remain that way for the foreseeable future. And there is tremendous pent-up demand for new houses after six-plus years of weak real estate markets.

The three homebuilders discussed below are large, geographically diversified builders with decent financials. They are well-positioned to profit from the ongoing rebound in the housing market as many smaller builders still struggle to obtain financing. If you like these value stock picks, I recently identified seven additional housing sector stock picks.

Beazer Homes (BZH) focuses on entry-level and first-time move-up buyers across 16 states in the West, East and Southeast. Since the housing peak, the company’s market cap has shrunk by nearly 90%. Beazer is a survivor, however, which is more than can be said for many homebuilders. The company is still a bit leveraged, but its cash holdings, access to credit lines and maturity schedules should mitigate the balance sheet risk. Also, its backlog is rising, and the company has substantial tax benefits to shelter earnings for several quarters. Trading below peer valuations, Beazer offers an intriguing play on rebounding housing.

BlueLinx Holdings (BXC) is a distributor of a wide variety of building products. Sales peaked in 2005 at $5.6 billion, before dropping to $1.75 billion in 2011. Sales have risen for the last eight quarters, but a return to profitability has been elusive. The CEO was replaced in May, and in June the company announced a wide-ranging operational restructuring. A renegotiated credit facility will buy the company more time. Nearly three fourths of the company’s shares are held by insiders, led by well-known bottom fisher Cerberus Capital.

Builders FirstSource (BLDR) provides some 65,000 building products to the new residential construction markets in the Southern and Eastern United States. The company has been making somewhat uneven progress in rebuilding its business over the last few years, but recent results have been encouraging. The company recently refinanced its debt, reducing interest costs and extending maturities. The building supply sector continues to consolidate which should benefit Builders FirstSource.

Home Builders: New Foundation for Profits?

Company Ticker Price 4-Year Range Market Cap Price to Sales Debt to Equity
Beazer Homes BZH 17.50 35.40-6.75 434 0.35 6.6
BlueLinx Holdings BXC 1.64 6.32-1.25 142 0.07 NSE
Builders FirstSource BLDR 5.84 8.60-1.01 563 0.43 NSE

NSE: Negative Shareholder Equity

Disclosure Note: Accounts managed by an affiliate of the publisher own securities in each of the companies discussed above.

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