Hope springs eternal, especially in the housing market.
The equities of homebuilders and home-furnishings companies have been on a tear, rising more than 60 percent in value last year and already up more than 20 percent this year.
It's logical enough: Last year was a terrible one for homebuilding, but lower interest rates helped prime the pump, and economic recovery may not be far away.
Yet nagging problems remain, such as the extreme difficulty smaller builders and retailers are encountering in obtaining credit. Furthermore, the financial intentions of the consumer are, to say the least, hard to predict.
"The industry has done enormous things since the discount rate was cut back in December, and most builders posted record orders for the first two months of the year," observed Katherine Collins, homebuilding and home-furnishings analyst with Fidelity Investments. "While there's some question as to what homebuyers will do this spring when they encounter somewhat higher interest rates, I believe the industry will carry on fairly well the rest of the year."
The rise in homebuilding stocks could make them a precarious ledge should the wrong economic scenario unfold.
"It's still sluggish, though some markets such as Phoenix, Las Vegas and Texas are doing particularly well and I expect 1.16 million housing starts nationwide for the year," said Kristopher Kelley, homebuilding analyst with the Value Line Investment Survey. "I think we're past the economic trough, but I don't expect a boom in housing and believe interest rates are the key."
Among stocks of homebuilders, PHM Corp., holding company for Pulte Home Corp., is recommended by Collins and Kelley. A builder of single-family homes and developer of residential subdivisions, it operates in 12 states.
PHM's bottom line is improving, Collins notes, and, with smaller builders slowed by the economy, it's able to pick up extra business. Kelley believes PHM's good earnings coupled with the best increase in orders in the business make it a top choice. A 1992 earnings increase of more than 60 percent is projected.
"Always keep in mind that the stocks in this group rank last in terms of safety or freedom from volatility, and that there is definite risk involved," warned Kelley. "They are speculative choices for risk-tolerant investors."
Lennar Corp., which builds moderately priced single-family and multifamily housing in Florida and Arizona, is another Collins selection. It has a huge mortgage-servicing business, has come up with earnings gains despite the weak economy and holds large amounts of land in Florida.
Kelley gives Lennar an "above average" rating. It has done "amazingly well," and he believes expansion into Texas should aid long-term results.
Centex Corp., the biggest U.S. builder of single-family detached homes and a leading originator of single-family home mortgages, is also favored by Collins. She considers it the most diversified company, featuring "stellar" management that's open about sales results. Another plus is that Centex owns a lot of good, inexpensive land. Following an earnings decline in the year that ends March 31, an increase of almost 50 percent is expected for the upcoming fiscal year.
PHM, Centex and, especially, Lennar are still attractively priced, Collins believes.