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Homebuilder Stocks to Watch in 2010

Stocks in this article: DHI NVR TOL

NEW YORK ( TheStreet) -- Homebuilding quiz: How many of the public homebuilders can virtually guarantee reaching profitability in 2010?

The answer: one, and only one.

Sad to say, but when it comes to forecasting profitability in 2010, one is the loneliest number in the homebuilding sector.

Indeed, the level of uncertainty is so great when it comes to the homebuilding stocks headed into 2010 that only NVR (NVR - Get Report) can be expected to turn a profit in 2010.

Considering that NVR is the only homebuilder to turn a profit in consecutive quarters -- many of them, actually -- it is not going out on much of a limb to make this call for 2010.

What has allowed NVR to separate itself from the woeful homebuilding sector?

Carl Reichardt, an analyst with Wells Fargo said the reason for NVR's massive outperformance of the sector over the past two years is, for one, the fact that the homebuilder doesn't own land, but only options on land, so when the downturn came NVR was not forced to writedown a substantial portion of assets. NVR also is concentrated in the northeast and Washington D.C., and lacks exposure to the worst housing markets out West.

The second key component of the NVR strategy is the vertical integration of its business. NVR has significant control over building materials, logistics and its building network, and that allows NVR to be much more efficient than peers, Reichardt noted. "The margin on the house itself is what they earn as opposed to the margin on the land, and that is the key," he said.

Still, at $692, is NVR a buy? It's by far the most expensive stock in the homebuilding sector. NVR has been trending up all year, though it is still off a 52-week high of $742. Wells Fargo's Reichardt has his price target in the mid-$800 range, so he thinks that relative to NVR's historic valuation, the shares are inexpensive.

"NVR has outperformed massively in the past two years, and can still outperform this year," said Joel Blocker, analyst with FBN Securities.

Still, not all analysts are as bullish on NVR, given the price point. James Wilson, an analyst at JMP Securities, said NVR is fairly expensive. "NVR has never lost money, and it's a great business. It's a well run company with a high return on capital, if you could get it cheaper," Wilson said.

Whether NVR is priced to buy or not, some analysts are clear on one point: "No one will be profitable in 2010 except for NVR," said Well Fargo's Reichardt.

But what of the others? Read on....

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