(MONEY Magazine) – REAL ESTATE DEALS

Value Hunters See Bargains in Home Builders

• IF YOU BELIEVE the stock market, real estate is on the verge of a spectacular flameout. Shares of leading home builders have plunged nearly 30% this year as higher mortgage rates have stoked fears that new housing activity will simply collapse. A measure of home-builder sentiment hit an 11-year low in June.

But just as home-building stocks (and home prices) may have gotten ahead of themselves over the past few years, the recent sell-off may be excessive as well.

Ron Muhlenkamp, manager of the MONEY 65's Muhlenkamp fund (ticker symbol: MUHLX), says momentum investors are bailing on what had been a hot group. The fundamentals for home builders haven't changed all that much in the past few months, he says, because rates remain low enough to keep demand intact.

"The home-building industry will come out of this in decent shape," Muhlenkamp says. "We don't see a wholesale housing collapse." His fund has four home builders in its top 25 holdings, including Centex (CTX) and NVR (NVR).

Analysts still expect the group to report, on average, annual earnings growth of about 14% for the next few years. And the stocks are dirt cheap. The 13 U.S. home builders with a market value of at least $1 billion are trading at 4.8 times earnings for the past 12 months, well below the industry's five-year average P/E of 8.3.

"Home builders are definitely getting interesting as far as valuation goes," says Jeff Auxier, manager of the Auxier Focus fund (AUXFX), which owns shares of D.R. Horton (DHI) and MDC Holdings (MDC). He adds that since many home builders have strong balance sheets, he wouldn't be surprised to see companies take advantage of the recent swoon and buy back their stock.

The prospect of bargains among home builders is a key reason that Third Avenue Real Estate Value (TAREX), a MONEY favorite, decided to reopen to new investors starting July 1 after closing to them in 2005. Manager Michael Winer says the fund, which owns small-cap builders Avatar Holdings (AVTR) and Brookfield Homes (BHS), is eyeing other builders and wants to be able to use new cash to "take advantage of opportunities when they arise and not have to sit on our hands."

Value funds aren't the only players that have taken notice of the bargain prices.

According to data from FactSet Research, even well-known growth fund managers such as Ron Baron and Tom Marsico have bought shares in home-building stocks this year. Baron's firm has purchased positions in Toll Brothers (TOL), MDC and Meritage Homes (MTH), while Marsico's funds have bought KB Home (KBH) and Lennar (LEN). --PAUL R. LA MONICA

SOUPED-UP FUNDS

ETFs Let You Make Bigger, Though Not Better, Bets

• ONCE A PLAIN-VANILLA alternative to traditional index funds, ETFs are cropping up in ever more exotic flavors. At least 20 new varieties made their debut in the second half of June alone, including funds that rise when the market falls (and vice versa), and others that track the Swiss franc or the Swedish krona.

The most adventurous new entries are four leveraged ETFs launched by ProFunds. Each of them uses borrowed money to double the movement of a major market index. If the Dow Jones industrial average is up 2%, for example, the Ultra Dow30 (DDM) gains 4%.

You'll want to avoid this thrill ride, since the leverage works on the downside too. For every dip in an Ultra index, the corresponding fund will drop twice as far. ProFunds CEO Michael Sapir says the new ETFs were designed to be tools for hedge funds, endowments and other investment pros: "We're not advocating unsophisticated investors use these tools without the advice of a financial professional," he says.

And analysts suggest that the funds' introduction may be one sign that the market for ETFs is weakening. "Leveraged products tend to be one of the last kinds of products that you see in a good market," says Lipper senior analyst Don Cassidy. "Novel products come late rather than early." -- JANET PASKIN

GURU WATCH

Is Google Still the "It" Stock?

SHARES OF GOOGLE, the popular search engine and profit machine, have fallen about 3% this year. But with the stock still up more than 370% since the company went public in August 2004, Google continues to have plenty of fans. Growth-stock picker Fred Kobrick, however, is not one of them.

And Kobrick is worth listening to. Thanks to his bets on companies such as Cisco and Dell, MONEY named his State Street Research Capital Appreciation fund one of the six best of the decade in the '90s. Kobrick now advises institutions on how to invest.

His biggest gripe with Google is that he thinks prices for online search ads are nearing a peak. That's a problem, he says, because the company doesn't look as if it knows what to do next. "Google's throwing a lot of mud against the wall to see what sticks," Kobrick says, as it trots out new mapping, blogging and payment functions. "That's pretty scary."

It's also a mistake, he says, to believe that Google will be the long-term winner in search. He thinks the stock's rise is an example of the "game-over syndrome," when Wall Street prematurely declares an industry champion and decides that it's immune from competition. "Google has had a lot of success," says Kobrick. "But it looks a lot like the old Xerox to me." -- P.R.L.

House stocks fold

S&P Home Building

S&P 500

SOURCE: Thomson/Baseline.