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TheStreet Open House

Top Homebuilder Stocks to Buy Now

NEW YORK (TheStreet) -- Stocks in the homebuilder sector were mostly in positive territory Wednesday, riding an overall market upswing that saw the Dow Jones industrial average surge well over 200 points.

Brookfield Homes (BHS) and Beazer Homes (BZH) may be leading the group in terms of share price gains for the day, rising 10.3% and 4.6%, respectively, but savvy investors should consider Ryland (RYL) and KB Home (KBH).

Ryland and KB Home are the top homebuilder stock picks of Stifel Nicolaus analyst Michael R. Widner. The analyst told TheStreet that these two outpace sector peers on both a price-to-book and normalized earnings basis, and both should work as long term value plays.

Widner conceded the housing market is in for a long and slow recovery period, and that ultimately, a sustainable pace of new-home sales is at least double where we are now.

"Based on that level of potential demand, if it takes three or four years to get there and we assume normal cycle-average profit margins, these are the stocks that should be worth two to three times what they're trading at today three years from now," he said.

Ryland shares gained 2.7% Wednesday afternoon to $16.54, while KB Home shares jumped 4.9% to $10.81.

The homebuilder group tends to form bottoms around adjusted book value, Widner said, and that's where Ryland and KB Home have been recently, trading around their 52-week lows. He doesn't think price-to-book is a particularly useful measure for the homebuilding sector, but understands that the market seems to think it is.

Based on generally depressed share prices, Widner said investors already priced in the sector's gloomy outlook.

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