Will the very thing that lead to the collapse also bring us redemption?
No, I'm not talking about banks. They made this mess and they're going to be unraveling themselves for years to come. I'm an ex-banking analyst and I've steered my readers away from these stocks for years. As each banking rally was met by a crash, more and more people have come around to my way of thinking. And my advice remains the same, "Avoid banking stocks like the plague."
But while I am rigid in my stance about bank stocks, I am making a very significant shift in another area. I'm talking about the housing sector.
Since before the financial crisis, housing collapse, call it what you will, I kept my members out of housing stocks. I don't want to say that I called the collapse, but the profits were thin and there were much better growth opportunities in other sectors.
After the initial shockwave of the financial crisis my inbox was flooded with emails asking me if the selloff in the housing sector had been overdone and if it was time to scoop up bargains.
My answer was an emphatic "No!" I said that in 2008, in 2009, in 2010 and—you guessed it—in 2011.
And so far in 2012 I have kept the housing sector in a sort of isolation. I quarantined it from any of my buy lists because there was simply too much downside and no significant updrafts for me and my members to ride with any amount of safety.
That has now changed.
Allow me to cover some of the data so you can see the shift that is happening and then we'll dive right into a handful of stocks that are showing promise for new investment and a few that are still plagued.
The housing rebound has finally begun, as both housing starts and building permits showed a significant increase last month.
Housing starts rose 6.9% in June to a 760,000 annual rate, the highest level in four years. That's up an impressive 23.6% compared with a year earlier, and an even more astounding 67% since its lows in April 2009!
Building permits to build new homes were up 19.3% compared with June 2011. And as you can see in the chart below, building permits have made quite a rebound since hitting rock bottom in April 2009—they are up 53%, to be exact.
The fact is that homebuyers are looking for move-in ready homes, but many of those picture-perfect houses are simply not on the market. Owners aren't willing to sell into the current price levels in many areas, and buyers have to look to new construction to find the options that they want.
Also supporting the turnaround is that home prices rose in April for the first time in seven months and continued those gains in May: Median prices in 20 major metropolitan areas increased 2.2% in May. Once consistent home price increases start to kick in, buyers start to regain confidence.
In fact, with home building numbers on the rise and prices beginning to solidify, the housing market is expected to begin contributing to GDP growth for the first time since 2007.
Mortgage rates are at record lows and pending sales are at the highest levels in two years, and I expect to see a continued improvement in the real estate market going forward in the months ahead.
There are still some risks affecting the market, but many of the problems still in this space lie with the banks—not the homebuilders—and the recent housing sector shake-out has led to clear winners in this space.
There's an exception to every rule, so I'm going to kick off my three buy recommendations with the rare kind of financial company—one has profited from the housing slump! If you're still leery of any and all financial companies, not to worry; my other two buying recommendations are home builders, plain and simple.
Altisource Portfolio Solutions S.A. (ASPS) is our first way to profit from the housing market. In the second quarter, total mortgage originations jumped 28% compared with the first quarter, while originations for multifamily properties advanced 21%. This is Altisource Portfolio Solution's bread and butter, as the company provides real estate and mortgage portfolio management, asset recovery and customer relationship management in the U.S.
So while the banks try to recover from the housing bust and simultaneously adjust to the uptick in new loans, Altisource Portfolio Solution's services will be in hot demand. As you can see by ASPS' stock report page, this company excels in terms of sales growth, earnings growth and return on equity. With 42% forecast sales growth and 81% earnings growth for this year, ASPS remains a great long-term play.
D.R. Horton Inc. (DHI) is the largest homebuilders in the U.S. With a workforce of 3,000, this company builds single-family homes in 71 markets in 26 states. Now as early as last October, I wouldn't have even given a second thought to this stock; back then, it was a D-rated sell. Since then, the company has taken advantage of the firmer housing market and has turned its fundamentals around. If you plug DHI into my PortfolioGrader tool, you'll see that this is an exceptionally strong company in terms of fundamentals, especially sales growth, operating margin growth and earnings surprises.
On top of this, DHI has a 1% dividend yield—the sixth highest (out of 50) in the Residential Construction industry. D.R. Horton's other claim to fame is that it has the third-highest Price/Earnings to Growth ratio, which indicates a stock's value relative to earnings growth. This means that DHI is quite a bargain right now, but because I can't guarantee how long this will last I recommend that you pick up shares now while they're cheap.
My final recommendation is actually a big rival of D.R. Horton: Toll Brothers Inc. (TOL). Based in Pennsylvania, Toll Brothers Inc. is the fifteenth largest homebuilder in the industry. This company is known for its luxury homes, drawing in $1.5 billion in revenue in the most recent fiscal year. With operations across dozens of major suburban market and metropolitan areas, this company has its finger in several pots, including land developing, golf course management, landscaping services and even mortgage services.
Like DHI, TOL has come a long way since October, having risen from a D-rated sell to an A-rated buy. Currently, Toll Brothers receives top marks in terms of earnings momentum, its track record of topping estimates as well as analyst revisions. TOL actually beats out DHI in terms of Price/Earnings to Growth ratio, so it just comes to show how undervalued this stock is currently. But the fact of the matter is that buying pressure has firmed up significantly over the past few weeks, so it's only a matter of time before more catch on to just how much of a steal this stock is.
Toll Brothers is set to announce earnings on August 22, and the way things are shaping up, this company could very well blow estimates out of the water. Now, analysts currently expect the company's bottom line to contract 28% year-over-year, but then again Toll Brothers has posted double- and triple-digit earnings surprises for three of the past four quarters. The Street also calls for 29% sales growth.
As I mentioned earlier, the real weakness in the housing sector is isolated to the financial companies that gambled with the housing market and lost. There are still plenty of ambiguities and unanswered questions on these companies' balance sheets, so I recommend that you steer clear of these three companies until further notice.
CB Richard Ellis Group Inc. (CBG) is the world's largest commercial real estate services company. But even with 34,000 employees worldwide and nearly $6 billion in annual sales, this company has plenty of room to improve in terms of its fundamentals. CB Richard Ellis Group has neglected its operating margin growth, earnings growth and earnings momentum, so this stock has declined from a B-rated buy last August to a D-rated sell for the past five months. Now while I know that last Wednesday's earnings announcement topped the Street view, but there's still too much uncertainty to make me bite.
Gazit-Globe Ltd. (GZT) is also a world leader in the acquisition, development and management of income-producing properties. With headquarters in Israel, the company has a significant presence in the U.S. as well as at least 20 other countries. In the States, Gazit-Globe operates Equity One Inc., Royal Senior Care LLC and ProMed Properties Inc. Even though this company is diversified across residential and commercial properties, Gazit-Globe has struggled to improve its financial statements. Of the eight fundamental metrics I grade GZT on, this stock pulls off passing marks only for its sales growth; the other seven metrics, including earnings growth, cash flow and return on equity, are C- or D-rated. I consider GZT a D-rated sell.
My last sell recommendation is Jones Lang LaSalle Inc. (JLL). Based in Chicago, this is a multinational financial and professional services company that specializes in real estate. With nearly $3 billion in annual sales, this company's motto is "real value in a changing world," but I just don't buy it. If you plug JLL in PortfolioGrader, you'll see that this stock has remained at a D-rated sell for much of the past year. And there's good reason for that too—while this company has improved its fundamentals, buying pressure has remained stubbornly at rock bottom! The fact is that analysts only forecast single-digit sales and earnings growth for the next quarter so this company has failed to grab investors' attention. I may consider this stock once buying pressure firms up, but until then I advise that you keep away from JLL.
I hope you've found this investing report useful and that it has helped give you some insight into the way I invest and think about stocks and sectors.
More reports like this, as well as details on my upcoming investing project are on their way. So be sure to keep a close eye on your inbox.