EVERYBODY'S GOT A STORY, IT SEEMS. THE nation's public home builders, large and small investors who bet on the residential construction market and its players, and the Wall Street equity analysts who cover the sector, all have a yarn. What's more, each has enormous stakes in a tale that goes happily ever after.
“The challenge for the home builders and for the analysts who recommend the stocks is to convince investors that the public home building companies truly have evolved into less cyclical, more stable performers,” one home building executive states. In other words, tell our story.
Collectively, publicly owned builders have invested money and effort trying to tell a consistent and now-familiar story of how they've changed. Each company has its own story, too, about the wisdom of its management decisions, the geographic markets, the diverse demographic segments it targets, and the size of the profits it makes.
DIFFERENT STROKES Investors, too, have a variety of stories that sometimes builders don't hear clearly. Their motivations differ. Some buy long-term; some go in for quick profits, some for earnings momentum, others for asset value, explains Carl Reichardt, managing director and senior equity analyst at Wachovia Capital Markets. “The builders sometimes have a hard time differentiating shareholder to shareholder because they like long-term shareholders who never sell, but that's just not the reality of the market,” he adds
The equity analysts' stories—less well known—are about guiding investors, adding value to the investment decision process, “looking for an inefficiency about the way a stock is traded, and taking advantage of it,” as Stephen Kim, managing director at Smith Barney, explains.
For a long time, the home building sector's analysts related their story to a relatively finite and varying mix of institutional and “retail” investors, depending on their firm's clientele. Now, the meteoric growth and success of the companies and the sector they research have propelled them into greater prominence, and they speak to a wider audience.
POWER PLAYERS Matt Moyer, vice president of investor relations at Centex, says that of the 50 percent of his time he spends, “talking to the outside world, I spend about two-thirds talking with actual investors and one-third with equity analysts.”
The sell-side equity analysts—those working for companies such as Merrill Lynch and Banc of America, as opposed to buy-side analysts who work for the large mutual fund companies and pension fund managers—have become so visible in the industry, that two of them, Ivy Zelman, managing director at Credit Suisse First Boston, and Kim, made it onto BUILDER magazine's “Power Brokers” list of the most influential people in home building, along with Alan Greenspan, George W. Bush, and the top executives at a number of the nation's largest home builders.
As analysts—and researchers, interpreters, sometimes de facto critics, and gadflies—it's their job to slice and dice the home builders' stories, read between the lines, ferret out new facts, and connect the dots of disparate information for the benefit of their investors.
By and large, they are bullish on the industry. Margaret Whelan, executive director at UBS, calls herself, “A diehard bull, and we have been for years” (see “First Person: Margaret Whelan,” next page). Yet each goes at it in their own way, which makes the stories they tell about the industry and market different from one another's.