Listening to a housing-stock analyst today is kind of like listening to an Internet analyst during the tech boom. The only difference is, housing analysts have reason on their side. It hasn't been prudent to bet against homebuilding stocks over the past few years, and betting against them today could be equally foolish, analysts say. What makes them all so bullish? For starters, pundits claim that valuations in the group remain low. Sure, the stocks have skyrocketed, but so too have earnings. That means price-to-earnings ratios have remained below their long-term averages. "They're still cheap from a historical perspective," said Lawrence Horan, an analyst at Parker Hunter. Parker Hunter has no investment banking relationship with these companies, although Horan does own a number of stocks in the group. Over the last decade, housing issues have traded at around 10 to 12 times future earnings estimates, whereas today, they trade at just eight times profit estimates. What's more, forward numbers continue to be revised higher. On Wednesday, Lennar ( LEN) beat second-quarter earnings estimates by a wide margin and said it expects to earn $8.50 a share this year and $9.50 a share next year, ahead of analysts' projections, which called for earnings of $8.01 and $8.18 in 2003 and 2004, respectively. Lennar is up almost 100% from where it was trading this time two years ago, but it sports a P/E ratio of around 9 and a price-to-sales ratio of just 0.7.
Reasons to Say, 'Hmmmmmmmm'
To be sure, the big run-up in the group might give investors pause, and some analysts have expressed concern recently about a possible rise in mortgage rates if a Securities and Exchange Commission investigation into Freddie Mac ( FRE) uncovers more issues. Still, analysts' arguments for a continued rise in housing stocks are compelling.