NEW YORK (
) -- Stocks in the homebuilder sector were mostly in positive territory Wednesday, riding an overall market upswing that saw the
( BHS) and
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 and KB Home are the top homebuilder stock picks of Stifel Nicolaus analyst Michael R. Widner. The analyst told
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
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.
Data released last month showed
to a record-low rate, while
in the month. Both sets of data came in far worse than expected.
Such dismal news creates opportunities for contrarian investors willing to go against group sentiment. Ryland and KB Home are deep value plays for Widner, not just catching the bottom of the trade.
homebuilders are such a volatile group, here is an opportunity to buy at what has proven to be the bottom of the trading range," he said. "If you buy and it takes 3 years to double your money, we're OK with that; you could also be up 20% in 6 weeks and perhaps take that as an opportunity to get out. In any case, for trading opportunities and longer term deep value,
Ryland and KB Home hold the most appeal for us."
Widner doesn't have a sell rating on any stocks in the homebuilding sector and is admittedly "fairly bearish on the sector," but upgraded shares of
from sell to hold in June.
His buy rating on Ryland KB Home marks the first time he's had buy ratings on any homebuilder stock for several years.
The housing market has been under tremendous pressure for some time, and demand fell further after the springtime
. Most analysts agree the situation is likely to get worse before it gets better.
The housing market saw sales ramp up in March and April as consumers rushed to take advantage of tax credits that offered as much as $8,000 for first-time homebuyers and $6,500 for repeat buyers. Following the expiration of those credits on April 30, the market saw a dramatic decline in demand for the month of May that spilled over into June. Data for July showed a further drop in demand. Lawmakers later extended the deadline to close on a home purchase and still qualify for the tax credit to Sept. 30.
-- Written by Miriam Marcus Reimer in New York.
>To contact the writer of this article, click here:
>To follow the writer on Twitter, go to
>To submit a news tip, send an email to:
Get more stock ideas and investing advice on our sister site,
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.