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Stocks to play the U.S. housing turnaround

Brad Wieland/Getty Images/iStockphoto

Mr. Bowman is a portfolio manager at Wickham Investment Counsel Inc. michael@wickhaminvestments.com

What are we looking for?

U.S. housing starts have gained 22 per cent over the past 12 months (to Dec. 31), and building permits, a sign of future demand, have increased 27 per cent over the same period. Confidence among home builders reached its highest level in more than six years, and the number of job openings at construction firms jumped 59 per cent, the most since May, 2008.

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My colleague Rob Belanger and I decided to take a look at the largest U.S. home builder companies using some industry-specific metrics.

The screen

We ranked our companies based on operating margin, which is a measurement of what portion of a company's revenue is left after paying for the cost of production, such as wages and raw materials. It is obviously a key metric for the survival of the company.

Other metrics include revenue growth; average closing price; dollar value of homes sold (closed); dollar value homes in backlog; number of lots owned; inventory turnover; and price-to-earnings ratio.

What we found

NVR, which was founded in 1948 to provide housing in the expanding postwar economy, led its peers with an operating margin of 7.5. It was also a busy builder; the company's inventory was sold and replaced 3.8 times over the past 12 months.

DR Horton Inc. leads in the value of all homes closed during the past year. (A home is considered to be closed or delivered when title passes from the builder to the purchaser.) The company also owns or controls the most lots.

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Pulte Group, the largest home builder by market cap, has the largest dollar amount of homes in backlog. (Backlog is the number of homes contracted, but not closed, plus any other homes in progress.)

Toll Brothers builds the most expensive houses, averaging $581,617 (U.S.).

MDC Holdings, which builds in 13 states, saw a 58.1-per-cent increase in revenue over the past year, while closing on $321-million worth of homes.

Conclusion

U.S. housing turned a corner some months ago and seems to be on the path to recovery. While no one company jumped out at us, investors could look at the top four companies listed since the operating margin is so important.

Editor's note: The original newspaper version of this article and an earlier online version incorrectly stated that U.S. home builder Lennar owns the most lots. As reflected in the table, DR Horton owns or controls the most lots. This online version has been corrected.

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About the Author
Portfolio Manager

Michael Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high net worth clients. Mr. Bowman has 30 years experience as an investment adviser and financial planner serving both individual and corporate accounts. More

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