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D.R. Horton, Inc. (DHI), Lennar Corporation (LEN): Harvard Likes the Housing Market

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Harvard University’s endowment has an impressive track record when it comes to investing. The endowment’s head recently told a Thomson Reuters-sponsored conference that the housing rebound is a “bright spot” in the U.S. market. Here are a few ways to invest in the space.

A Good Record

According to Reuters: “Over the last two decades, Harvard’s $31 billion endowment, the nation’s largest, has delivered annualized returns of 12.5%…” That’s pretty impressive. So it makes sense to listen when the head of the endowment, Jane Mendillo, talks up a sector. Housing, then, deserves a look.

Another Take

Interestingly, John Hussman, who is negative on the market overall, recently gave investors a good reason to believe that the housing market has some legs to it. He notes that there are still millions of homes worth less than the mortgages owed on them. Since these can’t be sold, “…the demand for homes resulting from household formation is satisfied from limited inventory plus new home building.”

While the long-term picture he paints isn’t positive, the housing analysis suggests that new homes sales may have more room to move. This is particularly true if companies like Blackstone continue to buy up distressed properties to turn into rentals. Here are some ways you can get in:

DR Horton

D.R. Horton, Inc. (NYSE:DHI) focuses on the new home market. If Hussman’s analysis is on the mark about new household formation, Horton builds the types of homes that should be in high demand.

The housing led 2007 to 2009 recession was nothing short of devastating for the home builder. In fact, in fiscal 2008, it lost over $8 a share. That’s a lot of red ink! However, it didn’t sit idle. Management worked to reduce debt and cut expenses. That’s set the company up to prosper as the housing market recovers.

The company’s performance took a notable turn upward between fiscal 2011 and 2012, when earnings went from around a quarter a share to well over $2. It probably isn’t reasonable to expect that kind of a gain in the near future, but continued solid performance wouldn’t be unreasonable. The shares had a decent run last year, but momentum investors who think the housing market recovery is going to continue should be interested.

Lennar

Lennar Corporation (NYSE:LEN) also sells homes to first-time home buyers. So it, too, should prosper under Hussman’s scenario. Like Pulte, the company used the housing downturn to streamline operations and reduce liabilities. However, a notable aspect of its efforts was the reduction in the number of off-balance sheet deals it had.

While the idea of keeping certain things off of a company’s balance sheet was considered good business at one point, the recession quickly changed that view. Indeed, many of the banks that used such techniques wound up taking government handouts. This has been an important step for Lennar Corporation (NYSE:LEN) in rebuilding trust with investors.

While Lennar Corporation (NYSE:LEN)’s earnings bounce between 2011 and 2012 wasn’t as pronounced as Pulte’s, it was still nothing short of impressive. Continued solid gains are likely if the housing market continues to improve.

Weyerhaeuser Company (NYSE:WY) and Plum Creek Timber Co. Inc. (NYSE:PCL)

Weyerhaeuser Company (NYSE:WY) owns 6 million acres of timberland in the United States, mostly in the western and southern domestic regions. These are more productive growing regions. Moreover, being in the west sets the company up to export products to Asia (about 30% of the top line is derived from foreign sales).

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