PulteGroup, Inc. (NYSE:PHM)

CAPS Rating: 3 out of 5

The Company is a publicly held holding company whose subsidiaries engage in the homebuilding and financial services businesses.

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Player Avatar floridabuilder2 (99.26) Submitted: 7/8/2010 2:22:15 PM : Outperform Start Price: $8.76 PHM Score: +32.88

Although Pulte Homes contains some downside risk during the Summer of 2010, over the next 5 years PHM will significantly outperform the SPY. US economic growth will be slow, however, demographics equate into a rising population which will absorb excess foreclosures. As I predicted homebuilder stocks have been slammed over the last several months and PHM is my first red to green thumb flip this Summer. Today new home starts is at all time lows and this is when you are considering time frames in which the population was in the low 100 millions and not in the low 300 millions. In other words, you are buying a stock with zero chance of bankruptcy in and industry that is at its lowest point in 50 years.

Although PHM has failed to write down a number of their raw land assets (e.g. future write downs), their land positions are long and better located than their peers. If their land positions were long in poor areas then that would be a different story. Pulte is a land company that happens to build homes. These type of companies perform poorly at this juncture and underperform their peers during a recovery. However, when housing is at normal levels around 1.2m new units a year and UE is below 6% that is when a PHM really peaks from a stock price stand point.

This recommendation is not for day traders or swing traders, but long term investors waiting for LT Cap Gains to go to 15% (after Obama's defeat). The hold period for this stock is 2015 at the earliest. If you like to trade stocks and aren't an investor then this is not for you. It will be boring for extended periods of time and go on big runs from time to time over this 5 year period. Homebuilders are difficult to play because many times they react opposite of the news. So expecting to time PHM is a mistake unless you are deep in the homebuilding trenches.

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Member Avatar MLGtrader (97.72) Submitted: 7/8/2010 4:24:28 PM
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Thanks for the insight into Pulte.

Do you think that builders will still hit a capitulation point, where it would be a good time to pick up some low priced builders for some large gains?

Thanks

Member Avatar amoldov (31.04) Submitted: 7/8/2010 5:40:27 PM
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TOL, KBH, MDC are back to the price point where you green-thumbed them in late '08 and early '09. Does that make them better buys than PHM? What I'm really asking for is a ranking ... or at least the best name to buy today(is it MDC?). Capital is limited.

Member Avatar floridabuilder2 (99.26) Submitted: 7/9/2010 10:22:13 AM
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If your a trader then buy SPF, HOV and BZH in that order... as to timing I would wait until late Summer or September. The only way I would pull the trigger sooner is if the Dow hit 9,000 prior to then. There is still downside on the builders, but the overall market has to correct and this will cause the builders to over correct. I don't expect good news from the builders this Summer and in this case bad news is bad news. I need to see how July numbers. Another indicator will be if any of these 3 stocks hit their 52 week low then that is a buy signal. Their 52 week lows actually will start moving up as they were reached last Summer. thus it will look like a double dip correction on the stock price (double bottom).

Member Avatar floridabuilder2 (99.26) Submitted: 7/9/2010 10:22:44 AM
Recs: 2

Amoldov, KBH has made serious strategic mistakes since i green thumbed them. They thought land (finished lots not raw land) prices would go much lower and so they dropped their margin to get an enormous jump in sales. In many areas KBH outpaced their competitors by 2x 3x in sales because their prices were at huge discounts to the competiton. The believe was monetize our existing land and then buy these lots dirt cheap. Well as I have stated over the past year, A and B finished lots doubled in price and their is an accute shortage of these lots because there has been no development since 2006. This would be akin to when you hear macro news that GDP is up on inventory replacement as companies drove their inventory levels down as much as possible. I said my green thumbs on homebuilders were perma 5 year buys, but short term KBH has dug itself a hole.

MDC also was very slow to buy up A and B lots. They hired a national executive in the Fall of last year whose sole purpose was to buy as much lots as possible in top areas. I am told MDC has been very successful in this area. The only glitch was that MDC has been closing communities (running out of lots) as quickly as it has found new communities. As a long term play MDC is a much better value at these levels given that it is $26 a share and it has $36 a share in cash (approximates). Their debt is all long term so there shouldn't be a drain in paying that off near term. I like MDC long term especially here, but again the small cap stocks above have more of an ability to jump 50-100% in a couple months once they bottom. Note that HOV and BZH have bankruptcy risk, but that risk is 2 years away. In the meantime there is zero risk of bankruptcy so you are playing the short interest volatility of these stocks.

Unlike NVR and MTH who were up huge at their Spring peak when I green thumbed them, TOL has also struggled mightly from a stock perspective. However, TOL is well positioned to outperform most of the other builders. The problem is that analyst are not giving any props to TOLs strategy of being a niche player that buys in A areas and is more of a land company that harvests land when it is at a maximum return.

Member Avatar floridabuilder2 (99.26) Submitted: 7/9/2010 10:27:38 AM
Recs: 1

Wow, lots of grammer and mispelling on KBH answer... Let bring a little more clarity to that response. KBH should have milked their current lot positions going for margin vs. sales. They should have also been aggressive land buyers last year. Instead, they depleted much needed inventory and are having a very difficult time of replacing that inventory in areas where there is actual demand. There are plenty of lots in bad locations, but no matter how low you drop the prices you can sell homes and if you can you are losing money.

Member Avatar amoldov (31.04) Submitted: 7/9/2010 11:47:59 AM
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Floridabuilder, I really appreciate your answer. You are a gold mine (a mine of golden knowledge). Thank you.

Member Avatar JakilaTheHun (99.93) Submitted: 8/11/2010 12:12:05 AM
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FB --- is there anywhere I could e-mail you?

I wanted to ask you a question on condo development and homebuilders.

Member Avatar floridabuilder2 (99.26) Submitted: 8/25/2010 10:33:49 AM
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pwcfloridabuilder@yahoo.com

Member Avatar nilesgold (22.39) Submitted: 9/17/2010 12:56:36 PM
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I'd be interested to hear your take on homebuilders in general and some of your recommendations in particular, now that more time has passed and there is more data out there.

Member Avatar FishSRQ (27.12) Submitted: 12/9/2010 11:36:50 AM
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Will we ever get another blog?

Member Avatar floridabuilder2 (99.26) Submitted: 1/7/2011 2:34:01 PM
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niles,

I am blogging under chimpcontest for reasons stated in my blogs (post takedown)..

fish,

Yes on chimpcontest I will blog homebuilders, but I had to kill floridabuilder because a public builder was reviewing my writings on specific things

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