Fund Flows Into Home Builders Are Slow but Remain Positive

By Janet Morrissey
From Dow Jones Newswires

Investor concerns about a possible crash in the homebuilding sector have been escalating in the past couple of months as industry fundamentals have been deteriorating at a faster clip than expected. However, the investor jitters have not shut down interest in the group as fund flows into the sector remained positive in May, although investors favored some homebuilding names over others.

A Birinyi Associates Inc. report, commissioned by UBS Associates, found general investor sentiment toward builders cooled in May from April, with investors carefully cherry-picking the homebuilding stocks they wanted to build positions in at this point in the cycle.

Fund flows increased into five homebuilding names -Centex Corp. (CTX), Meritage Homes Corp. (MTH), Standard Pacific Corp. (SPF), Pulte Homes Inc. (PHM), and WCI Communities (WCI) - in May. However, money flows significantly slowed in others, with the biggest drops appearing in D.R. Horton Inc. (DHI), Ryland Group Inc. (RYL) and KB Home (KBH). Despite the slowdown, fund flows didn't turn negative, indicating investors were not pulling out of the stocks.

"Of the 15 homebuilders we monitor, Birinyi found that money flows were positive into five in April and neutral among the remaining 10," said UBS analyst Margaret Whelan. "None of the companies had negative flows," she emphasized.

Whelan said the fund flow data is a good barometer for gauging near-term investor sentiment and psychology toward the group.

"Homebuilder investors know that the cycle in psychology has as big an influence on the stocks as that of any economic cycle," said Whelan.

Although there has been much talk of a housing bubble and homebuilders have been reporting a sharp drop in orders in the last two quarters, investors don't believe the sector is heading for a crash - at least not yet.

"Otherwise, they'd be selling" and fund flows would be negative, said Whelan. "The reality is that actions speak louder than words."

The fact that many of the fund flows were neutral - meaning there were as many buyers as sellers in the stock - indicates much of the institutional money is sitting on the sidelines waiting. "When institutional money is coming into the group, then the flows are positive," Whelan said.

Homebuilding stocks fell about 32% in the first five months of the year, marking the steepest drop in five years, the report said. The last time the group saw a sharper falloff was in 1999, when homebuilding stocks declined 45% over 292 days.

"I think that overall the valuations are so low that it's making people more interested," Whelan said.

Homebuilding stocks were off across the board Monday, with shares of Beazer Homes USA Inc. (BZH) off 3.4% to $45.72, KB Home off 3.2% to $43.32, Lennar Corp. (LEN) down 3% to $43.77, M.D.C. Holdings Inc. (MDC) down 3.6% to $50.97 and M/I Homes Inc. (MHO) down 3.6% to $31.36.

Meritage stock was off 4.5% to $47.90, Pulte Homes was down 3.1% to $27.38, Ryland was down 3.9% to $41.64, Standard Pacific was lower by 4.5% to $24.85, Levitt Corp. (LEV) was down 4.2% to $14.53 and Toll Brothers Inc. (TOL) was down 3.6% to $26.16.

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