Buying Homebuilder Stocks at 'Sell' Levels

BOSTON ( The Street Ratings) -- In a story last week, I said it was a good time to evaluate homebuilder stocks because of depressed values and negative sentiment -- two key ingredients for a rebound.

Here's a closer look at specific stocks in the industry.

Homebuilders have been decimated over the past month (see second chart, below), with the S&P Homebuilders ETF ( XHB) losing a quarter of its value. Worries over a double-dip recession, high unemployment, poor housing sales and scant work on new homes have led investors and economists to conclude that there's no recovery in the offing.

I offered that, with such dim hopes, a contrarian stance could lead to big-time profits.

Take a look at the first chart below, which shows the price-to-book ratio. We now stand at 1.06 times, which is 25% below the average of 1.4 times from 2009 to 2011, and 50% below the average of 2 times from 2002 to 2005.

I acknowledge that we are unlikely to see an immediate recovery in housing. But based on valuations, and what I sense to be more stability with many companies in the industry, it could be well worth the risk for a longer-term investor.

As to the risks, the biggest concern is the amount of shadow inventory that could potentially flood the market. I've heard 20 months of supply is waiting in the wings. But there is also discussions surrounding turning foreclosure inventory into rental units, which might help relieve pricing pressure.

I've provided details of homebuilders' geographic footprint inventory, financial position, insider activity, and the level of risk and reward. This week I'm looking at five names that have been hit the hardest over the past month: Beazer ( BZH), Pulte ( PHM), M/I Homes ( MHO), KB Home ( KBH) and Hovnanian ( HOV). I will follow up with another piece covering the rest of the group.

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