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Stingy Investor Tip Sheet

Builders Burning Book Value

I like looking at stocks that most people stay away from. Beleaguered U.S. homebuilders fit the bill these days. Most of them crashed months ago and the sector remains a no-go zone. That makes it potentially interesting territory for value investors.

But before diving in, it is important to figure out if a homebuilder has staying power. Do these companies stand a chance of surviving the current downturn or are they likely to go bust?

To get some preliminary clues, it is worth looking at debt-to-equity (D/E) ratios. Stocks with high debt levels tend to be relatively risky.

Mind you, all the equity in the world isn't going to help if you're burning through cash like a drunken sailor. Did I mention that U.S. homebuilders are currently less than profitable? Let's take a look at how quickly these sailors are burning money.

More specifically, let's determine the number of years it would take for each homebuilder to reduce their equity to zero based on one of two loss rate assumptions. The first loss rate simply extends the firm's latest quarterly loss rate into the future (Y-Q). The second is based on the company's trailing 12-month loss rate (Y-Y). Both figures are at best guesses and we hope that the firms turn profitable before they run out of money. But it seems clear that most homebuilders can't continue for long based on their current loss rates.

Company	                Price	P/B   D/E   Y-Q  Y-Y
======================= ====== ===== ===== ==== ====
Beazer Homes (BZH)	 $5.91	0.27  2.09  1.9	 1.3
Standard Pacific  (SPF)	 $4.97	0.32  1.62  0.9	 0.9
Orleans Home (OHB)	 $4.05	0.66  4.44  0.5	 0.9
Centex (CTX)		$16.04	0.85  1.71  3.6	 0.8
Hovnanian (HOV)		 $8.13	0.97  3.40  0.8	 0.5
D R Horton (DHI)	$13.18	1.07  1.00  2.3	 1.9
Toll Brothers (TOL)	$24.57	1.13  0.69 28.1	10.9
K B Home (KBH)		$20.32	1.35  1.70  1.1	 0.8
Source:, September 24, 2008

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On the plus side, some firms appear to be better positioned than others. Analysts even expect two companies (DR Horton and Toll Brothers) to earn money over the next year.

Just keep in mind, if we are heading into a repeat of the dirty 1930s then all bets are off for homebuilders. The entire industry could fail. But, if the real estate market levels off, select homebuilders might be good bets.

09/24/2008   11:45 PM EST   Permlink   save & shareP/B

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