This Hedge Fund Guru Is Buying Homebuilders -- Should You?


Few hedge fund managers can lay claim to keeping their doors open for over 20 years. Even fewer have grown to manage billions or more, putting billions in their own pockets in the process. Perhaps most impressive, only a tiny percentage of them have done this all before the ripe old age of 50.

#-ad_banner-#At 45 years old, Ken Griffen has proved himself many times over in an industry where money talks. Griffin founded Citadel, one of the most recognized and successful funds in the world, in 1990. With an estimated net worth of $5.2 billion, Griffen has been besting his fellow competitors and providing excellent returns to his clients for decades.

Citadel has been shaking up its portfolio recently with the addition of a number of real estate stocks, many of them homebuilders. Mortgage rates have continued to remain low, with existing home inventory and building supply lagging since the recession. Add in new highs for home prices in burgeoning markets such as Texas, and you have the perfect cocktail for a rise in residential construction stocks.

These bullish positions have been disclosed in the past month through multiple 13D and 13G filings. These forms outline holdings in which an asset manager has taken a significant (greater than 5%) position in a company's shares and are submitted to the SEC within 10 days of the actual trade. (My colleague Dave Goodboy recently took a look at 13F filings by hedge funds and what they can mean.)

For the retail investor, this translates into timely insight of a fund's strong convictions. Let's take a closer look and see if these positions are worth duplicating.

Meritage Homes (NYSE: MTH )
Meritage Homes (NYSE: MTH ) builds primarily in the southern and western U.S. -- areas that are seeing a strong resurgence in growth right now. The fund bumped up its position 25% between the end of last quarter and its 13G disclosure in mid-February, to almost 3 million shares. Meritage had just issued an earnings beat (with revenue growing 47% year over year) a few trading days prior to the filing making its way to the SEC.

The stock has fallen out of fashion with analysts at Bank of America, who downgraded the stock earlier this week, although consensus price targets show a potential growth of 12% from current levels.

KB Home (NYSE: KBH )
KB Home (NYSE: KBH ) saw an even larger percentage commitment from the firm in this first quarter of 2014. Citadel's 13G filing last month showed a 61% increase in the size of its position versus what it disclosed at the end of last year.

KB Home is trading on the lower end of its range looking a year back, staying depressed after the sell-side has battered the stock with downgrades recently. Bank of America, Raymond James and Barclays have all given KBH an unfavorable look since the start of this year. Despite Citadel's hopeful outlook, I would seek other options before choosing KB Home versus its competition.

Beazer Homes USA (NYSE: BZH )
Beazer Homes USA (NYSE: BZH ) might just be that other option, despite its small size. The company's market cap is about $500 million versus $1.8 billion and $1.5 billion for MTH and KBH, respectively. Citadel increased its position by an astonishing 72% last month. The jump in size came even after the stock registered a gain of 30% looking back a year, meaning the fund might be looking for more growth in the future.

Wall Street is on board with that idea, coming together to form a one-year price target that is 10% north of current levels. The growth has been spurred by continual earnings beats quarter after quarter, which could mean that even analysts' estimates are undervalued.

Risks to Consider: Citadel is also heavily involved in options trading , and the fund's 13F disclosed both put and call positions in each stock profiled above. Those positions are most likely hedged or spread trades, but I cannot say with complete certainty. Also, possible future rises in interest rates could impede long-term growth in these stocks.

Action to Take --> The residential construction space is ripe with stocks being snatched up by investors at the moment. Individual stocks or even a sector ETF such as the iShares U.S. Home Construction ETF (NYSE: ITB ) could give your portfolio ample and diverse exposure to this hot industry.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Investing Ideas , Stocks

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