Build Your Portfolio On NVR's Foundation -- Skip Toll Brothers, KB Home
How bad is the housing market? Here are four indicators:
- Millions of foreclosures. According to RealtyTrack more than 2.3 million houses have entered foreclosure since December 2007.
- Dropping prices. According to S&P, house prices at the end of May were 33% below their July 2006 peak,
- Breaking ground on new houses is at a low. According to the Commerce Department, housing starts dropped 5% in August, the most since April 2011, to a seasonally adjusted annual rate of 571,000 units, and
- Housing sales are down from July 2011, lowest in six months. In August, sales of new single-family houses were down 2.3% to a seasonally adjusted annual rate of 295,000, according to the U.S. Census Bureau and the Department of Housing and Urban Development. The good news is that this is 6.1% percent above the August 2010 level.
- NVR: profitable, cheap stock. NVR's revenues rose 11% to $2.7 billion in the last year and its net income of $156 million was up 7.2%. But the good news is that the stock is cheap -- based on a Price-earnings-to-Growth ratio of 0.65 (1.0 is fair value). NVR's P/E is 23.6 on earnings forecast to grow at 36.4% to $36.15 in 2012.
- Toll Brothers: barely profitable, cheap stock. Toll Brothers' revenues fell 15% to $1.45 billion in the last year and its net income of $75 million was up 100%. Although it has a slim profit margin the stock is cheap -- based on a Price-earnings-to-Growth ratio of 0.48 (1.0 is fair value). NVR's P/E is 32 on earnings forecast to grow at 66.5% to $0.34 in fiscal 2012.
- KB Home: unprofitable, high dividend yield. KB Home's revenues are down 13% in the last year to $1.3 billion during which it posted a $175 million loss. But the good news is that it has a high 4.23% dividend yield. And with 42% of its outstanding shares sold short, KB Home is the fifth most heavily shorted stock on the NYSE, according to Bloomberg. This suggests that KB Home's stock could drop which would raise its dividend yield -- if the company can keep paying a dividend.