Builders' Stocks: Too Cheap Not to Own

D.R. Horton(DHI) reported decent numbers Wednesday, and most importantly, its unit orders were up 28%. However, the bears are not writing about these orders the same way they commented on Toll's(TOL). Horton delivered 50,000 homes, compared with 9,000 for Toll. Now, you tell me what's happening in the housing market.

I don't think that many investors, not even the sell-side analysts, are aware that what really happened at Toll was a management mistake. They simply filled out existing communities too quickly last year. That maneuver gave them monster numbers then, but is a big problem today. Don't base your opinion of a $200 billion industry on Bob Toll's comments. Look at the entire group.

Hmmm. Horton orders up 28%, Beazer(BZH) up 15%, Hovnanian(HOV) up 38% and Pulte(PHM) up 20%. What am I missing? Seems as if most of the large public builders are managing the current slowdown just fine.

I know that the real estate bull market is over. I have been incorrectly forecasting this for five quarters now. It's about time. Housing demand and prices have flattened. But if you keep reporting that as news, you need to buy a clue.

But, just as with the steel sector, high-quality housing stocks can trade up big in a soft landing. Don't get bummed by the incessant bearishness of the sound-bite shorts. The sector is too cheap not to own.

Once again, if the sector implodes, the builders have index-type downside. If it undergoes a soft landing, another big trade into spring.

Marcin vs. Cramer

Obviously, Jim Cramer and I disagree on the homebuilders. I had sold them into the "land bank" run, but repurchased them recently after their big decline.

However, our disagreement is more fundamental than that. He says to follow the stock-price action, and I say follow valuations and fundamentals. I have made an entire career out of buying stocks that are dropping big to cheap valuations, with good fundamentals.