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Insiders See More Life in These Housing Stocks
By
Michael Brush
March 16, 2005
When you see top managers buying shares at a few companies in a sector
that’s otherwise plagued by voracious insider selling, it’s worth a closer
look.
That’s exactly what we find in the homebuilding sector.
First, the exodus. Insiders at the five biggest homebuilders alone offloaded
a hefty $375 million worth of shares in the past year, according to data
from Thomson Financial. Top five homebuilders whose insiders contributed
include: D R Horton (DHI),
Centex (CTX)
and Toll Brothers (TOL).
But selling has been pretty thick for nearly all of the twenty-one publicly
traded homebuilders.
In contrast, two smaller homebuilders stick out like a sore thumb. Insiders
have been buying at tiny Comstock Homebuilding Companies (CHCI),
with a market cap of $255 million. They’ve also bought at Orleans
Homebuilders (OHB),
with a market cap of $363 million.
Because of these buy signals, plus some positive underlying trends, it makes
sense to own shares of these two -- as long as you’re not in the bearish
camp that thinks rising interest rates will kill the housing boom. (But even
if you are negative on homebuilders, these two can help you. More on that in
a second.)
Interestingly, these homebuilders lie at the extremes in the sector.
Comstock has the highest growth rate in the group – which could make it a
momentum play of sorts. In contrast, the stock of Orleans Homebuilders –
which has stumbled to meet earnings expectations – has gone nowhere since
last summer. That makes Orleans about the cheapest name in the homebuilding
group. Here’s a closer look.
Comstock Homebuilding Companies
Based in Reston VA, this company does about 90% of its business around
Washington, D.C. The area has one of the hotter housing markets in the
nation – thanks to above-average population growth and low unemployment.
Washington currently suffers from a housing deficit of about 43,200 homes,
says BB&T Capital Markets analyst Todd Vencil.
That may help explain why new orders at Comstock in January and February
were up 85% year over year, measured by value. At the end of February, the
value of the company’s backlog was up 243% year over year, and 29% since the
end of 2004.
“Our core market in the Washington, D.C. area is still very strong,” says
finance chief Bruce Labovitz. “We are seeing tremendous opportunity in this
market, and the numbers reflect that.”
The company has spent the past few years developing its own land base – as
opposed to purchasing finished lots. That should help it reap dividends
ahead. Comstock has around 4,000 lots for development – about a four-year
supply at current growth rates, says Labovitz.
Comstock expects up to $260 million in revenue this year, or a 150% increase
over 2004. It hopes to see 60% revenue growth in 2006. The company has a
projected three-year earnings growth rate of 41%, according to Thomson
Financial. That’s way more than the range of 10% to 15% for most
homebuilders. But the company’s valuation is just slightly higher than that
of the group.
Insiders, including chief executive Christopher Clemente and finance chief
Labovitz, have bought $316,000 worth of stock since the company came public
in December. As a recent initial public offering the stock is volatile, so
it may pay to wait for a good price. One insider recently purchased in the
$25 to $26 range.
Orleans Homebuilders
Orleans Homebuilders, located outside of Philadelphia, hit revenue
expectations on the nose last quarter. But the company fell short on
earnings – in part because of higher expenses and charges stemming from
acquisitions. These seem like temporary problems, and the stock looks cheap.
It has a price to sales ratio of just .4. The rest of the homebuilders have
price to sales ratios ranging from .5 all the way up to 1.1 for Toll
Brothers.
Orleans has developments in several states on the East Coast and in the
Chicago area. But its main focus is Pennsylvania and New Jersey -- where
there are land shortages that should help the company.
There’s been insider selling at Orleans. But a director named John Willard
Temple bought $317,000 worth of the stock in mid-February for $19.22.
Another positive sign is that insiders exercised $1.1 million worth of
options around the turn of the year, but did not sell the shares. Insiders
may do this to get the tax consequences of exercising options out of the way
now, in anticipation of further share price increases.
The Great Housing Debate
Bears think the housing boom will soon be stifled by rising rates. Bulls
argue that the Federal Reserve Board will only raise rates gradually – so as
not to kill the recovery. So they believe housing growth will be around for
awhile still. Bulls also argue that population growth continues to outstrip
the supply of new houses – so imbalances will persist.
Here’s a key factor to watch, says Toll Brothers finance chief Joel Rassman.
Historically, housing growth doesn’t really start to slow down significantly
until the 30-year mortgage rate moves to 8% from 6%. We are still far from
that.
Bottom line: If you are bullish homebuilding stocks, add these to
your portfolio. If you are bearish and short the homebuilders, these two
might serve as long positions in “pairs trades” that will help you hedge
against too much damage if your sector call is wrong.
Writer: Michael Brush
Disclaimer
At the time of publication, Michael Brush
did not own or control shares in any of the companies listed in this column.
Mr. Brush is an independent correspondent for this web site.
For more on Insiders Corner disclosure, see About Insiders Corner:
http://www.investorideas.com/insiderscorner/. InvestorIdeas.com
Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not
affiliated or compensated by the companies mentioned in this article.
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