BOSTON (TheStreet) -- Homebuilder stocks and exchange traded funds were the ultimate symbols of the credit crisis: high-flyers that crashed to Earth more spectacularly than any other industry.
Now that the economy is growing again and the Federal Reserve has pledged to keep interest rates low, investors are once again buying homebuilder shares and ETFs. The
S&P Homebuilders ETF
has soared 13% in the past month, compared with the
S&P 500 Index's
0.9% gain. The homebuilder ETF has returned 26% this year, four times the pace of the S&P 500 ETF.
Homebuilder stocks haven't moved in lockstep.
have outperformed the S&P 500 in the past year -- with Lennar more than doubling -- and
have lagged behind. Over three years, KB Home and Pulte have fallen more than 50%.
Toll Brothers, Pulte Homes, Lennar, KB Home and D.R. Horton are exposed to Florida and California, among the hardest-hit real-estate markets, but do no business in the stable Midwest. As a result, the rebound may not materialize for some time, making other investments more attractive.
A stellar home-sales report and an earnings beat by D.R. Horton has brought heat to the industry. But given the fact that the first-time homebuyers' tax credit has expired and lending standards are as strict as ever, don't expect a run back to the highs that the industry experienced before the bubble burst.
No homebuilders receive a "buy" rating from
model. Most are languishing as a "sell." Limp profits, volatility and indebtedness are major risks. With an average financial-strength score of only 3 out of 10, there's still much deleveraging to be done.
The industry is expensive based on its expected price-to-earnings ratio. Homebuilders' P/E ratio is 40.7, compared with 14.9 for the S&P 500. Homebuilders clearly aren't bargains.
Early signs of a rebound may not be sustainable. Now that the stimulative tax credit has been withdrawn, orders probably will fall in the quarters ahead. In addition, sales may have been inflated by those moving up purchases to qualify for the tax credit.
Toll Brothers, Pulte and KB Home will post losses this year, analysts predict. As it stands now, expecting runaway profitability before 2012 is a pipe dream. Because homebuilders enjoy the greatest success when they sell into overheated markets at prices that dwarf costs, they may not be in the cat-bird seat for years.
Investors would benefit by early-stage recovery bets such as energy and business-infrastructure stocks. Once the rebound is in full swing and major economic problems, such as inflation and taxation, are resolved, homebuilders could be a smart bet.
When the turn happens, builders that focus on "green" building and more sensibly sized homes may be the best bets. While Americans no doubt will gravitate toward extravagance, the taste of the most recent crisis will still be in the mouths of many, leading them to scale back and join the rational crowd.
-- Reported by David MacDougall in Boston.
Prior to joining TheStreet Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.