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The Value Guys are Piling into Homebuilder Stocks

By Stansberry Research Interview Series
Friday, November 17, 2006

I must have struck many of you as a nutcase when I suggested Wednesday that homebuilder stocks are a great buy at the moment.
 
My argument is simple: Large homebuilders like Pulte Homes (PHM), D.R. Horton (DHI), and Centex (CTX) have all been in business for decades. They’ve been through boom and bust before. And all of them are trading for single-digit earnings.
 
Simply put, the worst possible housing outcome has already been priced into these stocks. At what point are these companies oversold? Two times earnings? One times earnings? At that price, you could buy the entire company and make ALL your money back in one year.
 
And we’re not far from that point.
 
Maybe I’m nuts. But I’m not the only one. A bunch of other nutcases have joined me at the funny farm. Their names are Bill Nygren, Bill Miller, Ronald Muhlenkamp, and Wally Weitz.
 
If you’re unfamiliar with Bill Nygren, he’s one of the best value investors in the world. Since its inception in 1996, his Oakmark Select Fund has averaged 18% a year. Well, Nygren has put $116 million (2.85%) of his fund’s holdings into Pulte.
 
Bill Miller’s another nutcase who owns Pulte. I’m sure you’re familiar with Miller – his Legg Mason Value Trust has beaten the market for 15 years straight. Obviously, you don’t beat the market for more than a decade by buying losing stocks.
 
Currently, Bill has $350 million (1.72%) of his Legg Mason Value Trust’s portfolio in Pulte.
 
Ronald Muhlenkamp also hangs out at the nuthouse. Since 1988, Muhlenkamp has returned 13% a year, outperforming the S&P 500 (10%) for the same period. When it comes time to get truly crazy, Muhlenkamp prefers Centex to Pulte.
 
He’s invested 2.47% of his $2 billion fund’s holdings into Centex.
 
Last, but certainly not least, is Wallace (Wally) Weitz, manager of Weitz Funds. Weitz’s Value Fund has averaged 13% for 20 years. That’s a total return of 1,129%.
 
Weitz just bought 100,000 shares of Centex.
 
Remember, all of these guys are value investors. They’re not buying these companies to make short-term profits. Rather, they’re buying great businesses at incredible prices. And they’re holding for the long term. Sounds mad, but it’s the best way to beat the market. You just have to be willing to look crazy for a while.
 
Sure, it’s not an easy thing to do, but at least you’re in good company.
 
Good trading,
 
Graham




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52-Wk
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52-Wk
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