Fair Value Measures

There are many ways to be a "Value Investor". There are people who uses deep quantitative statistical methods. There are people who use qualitative methods only. There are people who use a mixture of both.

Using a Relative Analysis
I use fair value as a way to feel more confident about the selection I have made. It is an arbitrary, relative measure best looked at as a range of price values; Not a line in the sand, hard black or white number used to trigger actions, but as an estimation of relative value to the sector. I use Benjamin Graham's Number to measure the bottom-line. The P/E is the current S&P average P/E and the P/Bv is the top 20% percentile. Currently that's an average P/E of 14.8. Other metric can be employed. You can experiment. For example, use Shiller's 10 year historical average P/E as the average metric.

Problems
Stocks that have no earnings or that have negative book value are not measurable. You can take a historic 5 year average earnings. The negative book value is hard to get around. Skip down to the next experiment below.

Benjamin Graham never intended his formula to be used as a gauge to measure how valuable a stock has become. It was to be a guide, which he actually abandoned later. But the one thing Graham had was an adaptable, flexible outlook that changed with time. He loved to experiment.

Expanding your scope
What if you wanted to expand this small universe of stocks.
How does your stock stand-up compared to its peers in revenues? Does your company not have any earnings for the last few years?

Let's use the same principle on the top-line figure. Using P/S and P/Bv. I am using the top 20% percentile of both P/S & P/Bv as the top-line fair value figure.

Now you have the bottom-line and  top-line figures covered.

No revenues? What about EBITDA? EBIT? enterprise value?

Sometimes the Value is Still Unknown
OK. Take the housing sector. The earnings are terrible and the book values have been decimated. But you know there is value there because the housing market volume is at historical 50 year lows.
OK. Back to the other value analysis methods. Statistically, the relative financial values don't stack up with the potential value.

Housing is finally receiving love again

PulteGroup (NYSE:PHM) was upgraded recently. Several home builders are at their 52-week highs.
Maybe its time to start looking in the housing market again.

House Prices Stabilizing?

Today S&P/Case-Shiller housing data came out with bad news. However, the housing conference this month says house prices are stabilizing. Many homebuilders companies are reporting the same.

You've heard the saying "Perception is Reality"?
It's not your perception but other people's perception that counts.

homebuilders

RealtyTrac, a leading online marketplace for foreclosure properties, released its Year-End and Q4 2010 U.S. Foreclosure Sales Report. It showed that foreclosure homes accounted for nearly 26% of all U.S. residential sales during the year.
Are foreclosures on a rise? According to Bloomberg, "Total U.S. filings in the fourth quarter fell 8 percent from a year earlier to 799,064. The tally for the three-month period was the lowest since the fourth quarter of 2008."

I live in western Pennsylvania. Around this area we did not participate in the hectic real-estate bubble and therefore have not felt the extreme bubble melt-down.
Areas in California, Phoenix and Las Vegas are bad. Collier County Florida has seen property values that are cut in half. Luckily we have only gone down about 10% - 15%.

Robert I. Toll, Executive Chairman of Toll Brothers Inc. (TOL) said in his
Q1 2011 Earnings Call Transcript the following:
"The territories that are good are good, but there is plenty of territories out there that are big and the uptick is very slight. So, we've got to remain cautious, until we put a few more of quarters behind us and we've got to remain cautious until some of those territories start to kick in."

The take away is that there are some regions that are prospering.
NVR Inc. (NVR) is a regional home builder from this area. The problem with the stock is it has an expensive price tag. It closed at 756.42 on Apr 1st.

It takes five to seven years to build land development from purchase to completion of the project.  Their is a wide spectrum of how companies deal with buying land. Some buy land as they need it and others buy land in advance, or in joint ventures to lock in today's prices. Home builders have now had about 3 years of cheaper land prices. Along with streamlining and other efficiencies they are starting to become profitable.

One year ago Seeking Alpha wrote a great article on home builder etf's. They weighed and compared ITB and XHB merits. The first conclusion is that neither etf is a pure home builder vehicle. ITB's accounted for about 70% of the portfolio and XHB was 35% last year. Looking at the company profiles today, ITB has 56.34% and XHB has reduced to 27.67%.


transcript
http://www.morningstar.com/earnings/22568805-toll-brothers-inctol-q1-2011-earnings-call-transcript.aspx?pindex=4&qindex=2

Barchart homebuilder sector
http://www.barchart.com/stocks/sectors/-BUSI?sym=MTH

XHBCompany profile
ITB Company profile

SeekingAlpha Comparison of the two etfs
http://seekingalpha.com/article/193144-battle-of-the-homebuilder-etfs-xhb-vs-itb

Foreclosure stats
http://www.bloomberg.com/news/2011-01-13/u-s-foreclosure-filings-may-jump-20-this-year-as-crisis-peaks.html

Other Opposing views
http://seekingalpha.com/article/261432-housing-prices-rise-in-response-to-reduced-supply-higher-employment
http://rismedia.com/2011-02-24/foreclosure-homes-account-for-26-percent-of-all-2010-residential-sales-according-to-realtytrac/
http://www.cnbc.com/id/42324054