John Buckingham has almost 10 percent of his $256 million Al Frank Fund invested in nine of the 10 biggest U.S. home builders. Buckingham says speculation about a housing bubble doesn't concern him.
"We still like the home builders and we like the bubble talk, too," Buckingham, 40, said in a telephone interview from his office in Laguna Beach, Calif. "The second we stop hearing about a bubble is when we start to worry."
Investors' speculation about a potential slowdown in home sales has kept home-builder stock prices "extremely low" relative to financial yardsticks such as earnings, he said.
Shares of Beazer Homes USA Inc., the fund's largest home-builder stake, are trading for eight times its estimated profit for the next 12 months, half the multiple for stocks in the Standard & Poor's 500-stock index. They closed Friday at $62.97.
Buckingham's mutual fund climbed 30 percent during the past 12 months, almost double the gain of competing funds that concentrate investments in stocks with low price-to-sales and price-to-earnings ratios. The fund advanced at an annual rate of 29 percent in the past three years, exceeding the 15 percent advance of the S&P 500.
Along with Beazer Homes, the fund holds shares in KB Home and D.R. Horton Inc., two of the best performers in the S&P 500 during the past year as home sales and property prices surged. Of the industry's 10 biggest home builders by market value, NVR Inc. is the only one that Buckingham doesn't own.
The median price for a new home was $214,800 in June, up 34 percent in the past five years, according to figures from the Commerce Department.
For almost three decades, the fund has honed its strategy of buying so-called value stocks, making an exception for money-losing technology companies that have relatively large amounts of cash. Al Frank Asset Management Inc., founded in 1977 by the late Al Frank, discloses its stock picks in a monthly newsletter, the Prudent Speculator.
The Prudent Speculator's recommendations have produced average annual returns of 19 percent during the past 25 years. It's the top performance of 13 newsletters that have been published continuously during that period, said Mark Hulbert, editor of the Hulbert Financial Digest of Annandale.
"If you were to say the Prudent Speculator has beat all mutual funds in the past 25 years, it sounds better than saying he beat other newsletters, though it's roughly the same thing," said Hulbert, who tracks 180 newsletters.
Hulbert tabulates returns for the Prudent Speculator's "buy" recommendations, though the flow of money into or out of the Al Frank Fund may prevent Buckingham from actually purchasing the stock. The Prudent Speculator, a 10-page report printed on manila paper, has 11,000 subscribers. A yearly subscription costs $295.
Buckingham, who has been an editor of the newsletter since 1990, said his first home-builder purchase was Fort Worth-based D.R. Horton in February 1999. He bought shares of Toll Brothers Inc. of Horsham, Pa., a month later.
Since then, D.R. Horton has surged ninefold and Toll Brothers has increased 12-fold as new-home sales reached a record for four straight years. D.R. Horton closed Friday at $38.45, while Toll Brothers ended the week at $50.95.
Growth in employment and incomes, along with low interest rates, have helped drive demand for housing this year, which is on pace to exceed last year's 1.2 million in sales.
The housing boom has worried some economists, most notably Federal Reserve Chairman Alan Greenspan, who said on July 21 that home prices may be "unsustainable" in some regions of the United States.
The central bank has raised its benchmark interest rate for the past 13 months, sparking concern that an increase in mortgage rates may curb demand for houses and lead to a drop in property prices.
Toll Brothers is the most expensive home builder in the Al Frank Fund, trading at 13 times next year's profits. D.R. Horton and KB Home, which closed Friday at $74.50 a share, trade for nine times earnings.
Buckingham joined Al Frank in 1987 after receiving a degree in computer science from the University of Southern California in Los Angeles. At first he invested in options because stocks were "boring" after the October 1987 market crash.
"I wanted to get rich quickly just like any other 21-year-old," said Buckingham, who holds stocks for about 61/2 years on average.
Some of his picks take years to pan out and often go sour for months at a time. He bought shares of Endwave Corp., an unprofitable U.S. maker of telecommunications equipment, in March 2002, drawn by its cash. The Sunnyvale, Calif.-based company had about $4.70 a share in cash and equivalent securities at a time when the stock was trading at about $3.40.
Endwave shares only got cheaper as losses mounted. In October 2002, the stock bottomed out at 40 cents. The Al Frank Fund lost 26 percent of its value that year, worse than 91 percent of its peers.
Both Endwave and the Al Frank Fund rebounded in 2003, surging sevenfold and 78 percent, respectively. In May, Buckingham sold the last of his shares in Endwave for $28. The stock closed Friday at $30.11 a share.
"It shows why you want to be patient with our strategy, and how we can invest in technology even when a company isn't making any money," said Buckingham. "What separates us from the rest is our stomach."