Sunday, June 8, 2008

Homebuilders Ranked By Discount to Book Value

We saw that market values tend to rotate around book values for home builders here. We also saw that markets tend to overreact both to the upside and the downside here, creating buy opportunities. Currently, most home builders are trading well below book value. Could this be a buying opportunity? Here they are, ranked by biggest discount to book:

Why such a spread between the top of the list (discounts in excess of 75% book values) and the bottom (barely any discounts!)? It could be that investors believe there are way more writedowns coming for those at the top. Investors may also have more confidence in certain managements' abilities to navigate through these difficult times.

Upon closer examination, notice the largest builders tend to have the smallest discounts. If we take a look at the discounts relative to the sizes of the companies, we get a chart that looks like this:

Notice how the largest discounts to book value (in excess of 50%) are for companies smaller than $250M. Also note that the largest companies tend to have the smallest discounts. Could it be that managements for the smaller companies are worse, or that they are more risky, or have higher debt levels? It's possible. Another reason could be that the stock market is less efficient for those smaller companies as we've discussed here (hence we see more variation among the discounts for the smaller companies), since they are too small for many institutions to buy.

It's worth taking a closer look at the companies with the largest discounts to book to see if they offer large margins of safety!


CanadianInvestor said...

Interesting post and blog. Found you through a link from Frank Voisin. Though I am an indexer and happy with that for now, alternative views are always good to read, especially when reasoned and presented well. Keep it up and remember that what for some is coma-inducing, for others is merely dispensing with sensationalism and info-tainment. You should do a post on your portfolio with explanations. Am adding yours to my bloggers list.

Anonymous said...

Undoubtedly the topic you`ve raised in your article is not a frequent one which you can come across every day. I`m working in the West Toronto area as a realtor and I`ve never get a deeper look into the business of the builders and about how much discount they get etc. Thanks for sharing with us this edifying article, I think we should be more open to get enough information in order to speed up our real estate market.