Without question, homebuilders are the most reviled stocks on Wall Street today. Year over year, building permits are down 28%, building starts are down 16%, and foreclosures are up 35% nationwide. The sentiment indicator of the National Association of Home Builders is at a 26-year low. Shares of one residential construction company after another have fallen at least 40%.
So, you may be thinking, why the hell should I buy a homebuilder stock today?
For context, page back to 2002, and recall how Internet stocks had been dragged into the town square to be kicked and spat upon. Valuations had collapsed, weak companies were folding en masse, speculators had capitulated. At the height of that calamity I had a memorable conversation with world-class money manager Marty Whitman, founder of the Third Avenue funds. He emphasized that at the core of most bubbles is a kernel of commercial truth that will eventually expand. He cited example after example of Internet-based businesses valued at less than the cash on their balance sheet, tagged with expectations of eternally negative growth rates. Whitman counseled in 2002 that it was a wonderful time to buy those stocks, since Web-usage statistics were strong. He was dead on.
I believe similar dynamics are at work in the homebuilding industry. The Census Bureau projects that by 2050 our population will have increased by 50%, to more than 420 million. We'll also be a much older society, with close to half of all citizens over the age of 45 (compared with around 37% today). What that means to me is that there will be major construction, particularly of second homes, in the Southern states.
One beneficiary will be MDC Holding (MDC), a homebuilder focusing on states like Arizona, Texas, and California. Accounting for dividends, MDC has rewarded shareholders with 16% annual gains over the past 20 years, which includes the 40% shellacking the stock has taken since July 2005. I expect more than a double through 2012 from MDC.