Funds See Shelter in Home Builders --- Alluring Sector May Crack In the Wake of Steep Gains And Its Recent Admirers
Mutual-fund managers are seeking shelter from a rainy market in home-building stocks these days. But the sector's foundation might be cracking under the weight of steep gains and all its newfound fans.</br></br>The number of mutual funds owning small and midsize home-building stocks like Lennar Corp. and Centex Corp. has risen sharply, doubling in some cases, since the start of last year. And it's easy to see why: Consumers taking advantage of low interest rates to buy, refinance and remodel their homes have boosted these companies' fortunes, pushing up the average price of the sector's small-cap and midcap stocks by 171% over the past two years through Friday's close, according to Baseline/Thomson Financial.</br></br>Faced with slumping growth-stock categories such as technology, telecommunications and pharmaceuticals and with 40% of U.S. stock funds in the red over the past three years, some battered fund managers also have piled into shares of larger home builders and related outfits such as home-improvement retailer Lowe's Cos. and mortgage titan Freddie Mac.</br></br>Some see the home builders as a rare haven for cheap valuations and better-than-average growth in lean times. But others worry the small and midsize stocks have risen too high, too fast and that quick-trading managers of mutual funds and hedge funds who have hopped on the bandwagon could be just as quick to jump off. Their heavy selling can cause the prices of these smallish stocks to sink.</br></br>"I've met with about 40 hedge-fund managers [last] week and if it's going up they're buyers, but they'll be just as quick to leave too," says Jeffrey Saut, chief equity strategist at Raymond James. "They do look attractive but this is usually when you want to sell them. You buy pessimism and sell optimism." (Hedge funds are private partnerships for large investors and seek quick profits by putting huge sums in global currency, stock and bond markets.)