New-home sales, which fell 10.5% in February, will likely continue to slow this year. And, not surprisingly, analysts aren't expecting homebuilders' profits to grow anywhere near the torrid pace of the past several years. As a group, the publicly traded homebuilders have suffered a sharp decline in their share prices since last summer. So does that mean now is the time for investors to go bargain-hunting? Carl Reichardt, an analyst as Wachovia Securities, says yes -- but be selective.
Reichardt sees opportunity among the big players that generate positive free cash flow and are likely to steal market share from small fry during lean times -- companies such as Ryland Group and Lennar, among others. He also likes luxury-home leader Toll Brothers, which, though not among the giants, competes mainly against small custom builders and has a strong presence in markets where the supply of land is limited. He says the company's well-known brand name, as well as its relative size, scale and geographic diversification, come in handy in a slowing market and help the firm win out over its competitors in the long run.
Reichardt upgraded his rating on Toll Brothers to "outperform" this week.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The Horsham, Pa.-based company caters to wealthier customers: The average selling price for its homes is about $660,000. Although it operates in 21 states, most of its sales are in the Northeast, including the Washington, D.C., area. Reichardt says the company should benefit from the impending retirement of well-off baby boomers, and he notes that its target buyer demographic -- households earning more than $100,000 a year -- is growing at six times the national average.
But Toll Brothers' stock (symbol TOL) has mostly been on the decline since last July. The stock, recently $35, is down 40% from its 2005 peak. That the company lowered its 2006 sales outlook last November didn't help. Wall Street's profit estimates have fallen considerably since last summer, when, Reichardt notes, analysts were calling for the company to earn $5.53 per share in fiscal 2006. He thinks the current average 2006 estimate of $4.99 per share is more realistic. Yet the shares trade at only seven times that estimate -- cheap enough to make this volatile stock compelling, in Reichardt's view. "Expectations are low and valuation reflects it," he says. From here, he figures expectations are more likely to go up than down.
--Lisa Dixon
-
Should You Renew Your CD?With rate cuts impacting earnings, we examine if now is a wise time to renew CDs.
-
7 Ways to Plan Now to Save on Medicare IRMAA Surcharges LaterUnderstand the critical two-year lookback period and why aggressive planning before you enroll in Medicare is the most effective way to minimize IRMAA.
-
Law Reversal Looming? Trump Eyes 2026 Gambling Winnings Tax ChangeTax Deductions It's no secret that the IRS is coming after your gambling winnings in 2026. But how long will that last?
-
If You'd Put $1,000 Into Coca-Cola Stock 20 Years Ago, Here's What You'd Have TodayEven with its reliable dividend growth and generous stock buybacks, Coca-Cola has underperformed the broad market in the long term.
-
If You Put $1,000 into Qualcomm Stock 20 Years Ago, Here's What You Would Have TodayQualcomm stock has been a big disappointment for truly long-term investors.
-
If You'd Put $1,000 Into Home Depot Stock 20 Years Ago, Here's What You'd Have TodayHome Depot stock has been a buy-and-hold banger for truly long-term investors.
-
What the Rich Know About Investing That You Don'tPeople like Warren Buffett become people like Warren Buffett by following basic rules and being disciplined. Here's how to accumulate real wealth.
-
If You'd Put $1,000 Into Bank of America Stock 20 Years Ago, Here's What You'd Have TodayBank of America stock has been a massive buy-and-hold bust.
-
If You'd Put $1,000 Into Oracle Stock 20 Years Ago, Here's What You'd Have TodayORCL Oracle stock has been an outstanding buy-and-hold bet for decades.
-
How to Invest for Rising Data Integrity RiskAmid a broad assault on venerable institutions, President Trump has targeted agencies responsible for data critical to markets. How should investors respond?
-
If You'd Put $1,000 Into Sherwin-Williams Stock 20 Years Ago, Here's What You'd Have TodaySherwin-Williams stock has clobbered the broader market by a wide margin for a long time.
