Hammering Out A Housing Play

With low interest rates, fat paychecks, and a fast-approaching new-home buying season, good times just keep rolling for the nation's homebuilders. Which raises a question: Is there a way for investors to tap residential real estate's persistent strength? Yes, but not the way you might at first think.

You probably want to steer clear of homebuilders. Their stocks are already reflecting the terrific times the industry has enjoyed over the past five years. The group is trading at nearly 21 times 1998 estimated earnings, but expectations of profit growth are running closer to 16%, says Value Line. A gap like that is a warning sign, so a better way to invest in the housing boom may be to buy savings-and-loan stocks. They still trade around 18 times earnings, a discount to estimates of 19% for profit growth. And since October, they've sunk 1.2%, vs. a 22.6% gain for builders.

Behind the poor showing are worries over how thrifts will profit when mortgage rates are so low. Yet some are better situated to handle that challenge than others. To figure out which are which, we contacted David Ellison, star portfolio manager of FBR's Financial Services and Small Cap Financial funds (888 888-0025). Financial Services, which invests in banks, thrifts, insurers, brokers, and real estate investment trusts, jumped 47.7% last year, while Small Cap Financial, which emphasizes banks, thrifts, and specialty finance companies with market values below $200 million, soared 58.1%. Ellison is more notable for his 11 years at Fidelity's Select Home Finance Fund. It grew by an average of 21.5% annually on his watch, crushing its peers by more than five percentage points.

Despite last year's gains, Ellison still finds opportunities among thrifts, observing that mortgage lenders have kept bad loans in check. Ellison favors stocks that are trading at low multiples to expected earnings. A fair range now for small-caps is 14 to 15 times future earnings, and a little more for large-caps. He also screens for book value--1.5 to 2 times for small-caps, a bit more for large-caps. Next, he picks out those with experienced management that rely on a stable base of low-cost deposits to fund loans. And "you don't want institutions that are growing too fast," he says, because they may be relaxing credit standards or letting costs soar.

Next, we turned to Telescan (www.wallstreetcity.com), which features a powerful search engine and deep database, to screen for thrift stocks with market values of $1 billion or more that are trading at low multiples to book and to estimates of 1998 earnings. Four names popped out that appear to be solid prospects (table).

H.F. Ahmanson is based in Southern California, which continues to bounce back from its real estate depression of a few years ago. Ahmanson has branched out to Florida and Arizona, among other places. Its fans include noted growth-stock investor Foster Friess, who made it the No.5 holding of $8.4 billion Brandywine Fund.

TIGHT FOCUS. Next came Astoria Financial. It has stayed closer to its New York origins, most recently via its purchase of Greater New York Savings Bank. It's also eyeing Long Island Bancorp. What's more, Astoria, like each of these four thrifts, has stuck to its knitting, with 91% of its loans made on residential real estate.

We also selected Golden West Financial, based in Oakland, Calif. An Ellison favorite, it's run by Marion and Herbert Sandler, who own nearly 19% of the shares. Other big owners include Vanguard/Windsor Fund and Davis New York Venture Fund, whose Christopher Davis calls it "arguably the best-managed S&L in the country."

Up in Seattle, Washington Federal has expanded throughout the Northwest and has outposts in Utah and Arizona. A slow grower, it enjoys low overhead of only about half the industry average, according to Standard & Poor's (which, like BUSINESS WEEK, is a unit of The McGraw-Hill Companies), while yielding 3%. Acorn Fund's stock-picker, Ralph Wanger, is among its fans. As with any of these stocks, there's no guarantee Washington Federal will go up. But if you're looking to play the housing industry's boom, thrifts are the place to be.

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