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Famed investor Bill Miller and manager of the Legg Mason Opportunity Trust (MUTF: LMOPX) mutual fund is taking a bullish stance on the housing market. Let’s check out the top four ways this famed investor is playing the housing boom.
Miller is essentially calling bond investor Jeffrey Gundlach and real estate mogul Sam Zell wrong. At this year’s Sohn Investment Conference, Gundlach noted that new home sales are slowing and housing starts are plateauing. The main driver is the fact that the younger generation has a preference toward renting.
But Miller notes that there hasn’t been a secular change in housing demand. Rather, individuals are just renting for a longer period. Mortgages remain tough to get, but housing affordability remains one of the bright spots in housing, and even Gundlach has admitted that.
While the expected rise in interest rates might slowdown home buying, borrowers will get used to higher rates. Miller believes that “anyone can get lucky for a short period of time. But consistent outperformance over long periods is probably evidence of skill.” By all accounts, Miller has skill. He has managed to beat the S&P 500 Index for 15 straight years.
So, how is Miller playing the housing market? Real estate and financials make up a third of his Legg Mason Opportunity Trust fund portfolio. Specifically, Miller is betting on mortgage insurers, homebuilders and subprime servicers.Here’s thetop 4 ways this famed investor is playing the housing boom.
Housing Boom Stocks #1 and #2: Miller Loves Mortgage Insurers
Miller’s biggest bet is on Genworth Financial (NYSE: GNW). This mortgage insurer is his mutual fund’s largest holding. Genworth also has a long-term care business. Shares trade at P/B ratio of only 0.56 and a P/E of 10 based on next year’s earnings estimates. Miller is interested in mortgage insurers given the fact that rising home values will support insurance claims, and increased home buying will generate new business.
MGIC Investment Corp (NYSE: MTG) is another mortgage insurer that Miller owns. For the month of May, MGIC wrote $2.8 billion in new insurance. That was a 22% increase from April. Its 22% increase was well above the 4% its top competitor Radian Group managed. This is just part of MGIC’s broader recovery from the sub-prime crisis. In 2013, MGIC wrote $29.8 billion in new insurance, up from $14.2 billion in 2011.
MGIC was the largest mortgage insurer in the U.S. for a decade, until it dropped to third in 2010. Despite trading near its 52-week high, MGIC still only trades at a P/E of 12 based on next year’s earnings estimates.
Housing Boom Stock #3: Miller’s Homebuilding Pick
When it comes to homebuilders, Miller’s largest position is PulteGroup (NYSE: PHM). This homebuilder constructs single-family homes, condominiums, duplexes and townhomes. The nice thing about PulteGroup is that it caters to a variety of customers. Its PulteGroup segment focuses on consumers looking to move-up, its Centex brand is for entry-level buyers, and Del Webb focuses on senior living and retiree facilities.
PulteGroup offers a 1% dividend yield and trades at a P/E ratio of 13.6 based on next year’s earnings estimates. PulteGroup is also the cheapest major homebuilder on a price-to-book value basis, while having the lowest debt-to-equity ratio. Miller believes the major homebuilder stocks will grow between 20% and 25% annually for the next half decade.
Housing Boom Stock #4: Miller is Very Bullish on Mortgage Servicers
Nationstar Mortgage Holdings (NYSE: NSM) is one of the nation’s largest mortgage servicers. Bill Miller has touted this as one of the best ways to play the change in government policy. The likes of Nationstar are taking over mortgage servicing (collecting mortgage payments) for the major banks.
What is pushing banks to unload servicing rights is the regulation on the amount of capital at-risk that banks can have tied mortgage-servicing rights. Miller notes, “anytime the government makes a major change, it usually creates a big opportunity.” Shares are still 35% off their 52-week highs after a regulatory investigation by the state of New York. The stock trades at a P/E ratio of only 8 based on next year’s earnings estimates. It also offers a 1.2% dividend yield.
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There are big names on both sides of the housing debate. Regardless of how the housing market does going forward, there are a couple areas that could still perform well. The mortgage servicers will continue to take market share from big banks concerning servicing rights. Mortgage insurers will benefit from both rising house prices and increased transactions. One of the underrated areas for PulteGroup is its exposure to the retiree market, which should benefit from the aging Baby Boomer generation.
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