Patience Could Pay Off With Homestore.com

First, the bad news: I think Homestore.com(HOMS) has yet to bottom. In fact, I think the near-term outlook for its real estate information business is downright awful. The slowing economy and the terrorist attacks of Sept. 11, coupled with a deteriorating advertising market, have pretty much put the kibosh on the next few quarters. But let me be clear, Homestore could still put some money in your pocket down the road.

How so?

For starters, the solution to our economic woes, at least from the Federal Reserve's perspective, has been to trim interest rates. Cutting rates, which makes home ownership more attractive, will almost certainly boost interest in Homestore's site(s). In addition, the argument could be made that the share price already reflects the majority of investors' skepticism. Let's face it -- just a few short months ago this stock was trading in the $30s, but now you can pick up one share for the price of a couple of Happy Meals.

Still, at this price the stock is nearing a point where it may be too attractive to pass up. Just take a look at Homestore's June financial statements and peruse its balance sheet. I had no idea that these folks have roughly $229.5 million in cash, equivalents and short-term securities. That equals about $2.11 a share!

What about its book value? Well, I don't buy the $12.36-a-share book value the sell side touts because it contains a number of intangibles. So let's do a little calculating of our own, shall we?

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If we simply subtract these intangibles from the company's shareholder equity number, we get a figure of $379.5 million. Dividing that by the number of outstanding shares, 108.8 million, gives a figure of $3.48 a share, which is the company's true worth based upon its assets, not its longer-term potential. That's pretty darn attractive compared with where the stock is trading. My point is that the downside at present appears quite limited.

So what should you do?

Be patient. I can't help but think that Homestore, after assessing the near-term outlook for the real estate and ad markets, will have to scale back its revenue and earnings projections a bit further. In addition, I can see this stock getting hit later this year by tax-loss selling.

So keep this one on the back burner for now, but be ready to pounce within the next month or so. In my mind, based upon the company's assets and presence on the Web, the shares are nearing a bottom.

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