Is there no place like the home construction sector?

Without much fanfare, one of last year’s losers is now rounding third base on the way to a homerun. Nobody expected it to be a winner this year. Given its record lately, it likely will be. That sector is home construction, which includes makers of building materials, construction, architecture and engineering firms, as well as manufactured housing makers.

Discarded in 2002 due to concerns over slowing growth, investors have wholeheartedly embraced home construction stocks in 2003. Why the change of heart? It comes down to these two fundamentals:

• Better-than-expected earnings in the first quarter
• Positive earnings guidance for the balance of the year

Home construction sector players should also thank Alan Greenspan. They have prospered due to the U.S. Federal Reserve’s historically low rates, which have insulated residential construction firms from the generally dismal economy in the U.S. and extremely volatile global stock markets.

This was not the consensus among analysts last year. While many market watchers remained optimistic about the industry’s prospects in 2003, they conceded that housing starts could be flat or down next year. The reason? Many expected, on a macro level, that mortgage rates would begin to rise and offset some of the eventual improvements in the unemployment rate. As a result, it was argued, we would see lower growth levels for home construction companies. This didn’t happen. Now the group is reaping the rewards.

What’s the outlook for the home construction industry in the months ahead? Probably higher share prices, for one thing. The reasons are simple:

• Reduced geopolitical tensions
• Bush’s significant fiscal stimulus package
• Decade-low interest rates
• Possibility of solid top- and bottom-line growth

Therefore, many analysts believe that any weakness over the short term (due to concerns over slowing growth) can be viewed as a buying opportunity.

What’s the bottom line? As the sector’s fundamentals steadily improve and its growth prospects become transparent, more and more money should continue to rotate into the home construction sector.

Some of the stocks that fall into this group include the following: Beazer Homes, Bocenor, Centex, D.R. Horton, KB Home, Lafarge Canada, Lennar, MAAX, Matco Ravary, Norwall Group, Pulte Home, Ryland, Standard Pacific, Toll Brothers and Viceroy Homes.

July 2002