Morningstar Advisor - Winter 2008 - 75

EL: Those firms with heavy debt burdens could have a tough time surviving. In fact, some face serious risk of bankruptcy. We consider Hovnanian HOV, Levitt LEV, WCI Communities WCI, Standard Pacific SPF, Orleans OHB, and Technical Olympic USA as speculative investments at this time. [Editor’s note: Some of these stocks are included in iShares Dow Jones U.S. Home Construction Index ITB, but they only consume about 12% of assets. I have about a 10% stake in ITB in my Hands-On Portfolio, a group of ETFs that I actively manage for Morningstar ETFInvestor.] Homebuilders ETFs Fund Name Inception Expense Ratio (%) 1-Year Ret (%) % in Top 10 Holdings Avg Mkt Cap ($mil) iShares DJ US Home Construction ITB PowerShares Dyn Building PKB SPDR S&P Homebuilders XHB Data as of Dec. 31, 2007 05-01-06 10-26-05 01-31-06 0.48 0.63 0.35 –58 11.14 –47.69 52.93 47.32 54.97 810 3,788 2,077 Positioned to Survive Analyst Eric Landry says these builders have manageable debt loads and, with the exception of Toll Brothers, have small amounts of land and inventory on their books. Company Morningstar Rating Business Risk Economic Moat %Below 52-Week High In between the well-prepared builders and the poorly positioned builders sits a group we think will survive all but the worst downturn yet will still pose above-average risk to investors. This includes Lennar LEN, Pulte Homes PHM, D.R. Horton DHI, Centex CTX, and Meritage Homes MTH. We have increased the business risk rating on these firms to above average from average, all for slightly different reasons. SM: What does that mean for investors? EL: It means they should demand a large margin of safety to invest in these stocks. SM: This industry clearly faces some serious NVR NVR MDC Holdings MDC KB Home KBH Ryland RYL Toll Brothers TOL Data as of Jan. 4, 2008 QQQQ QQQQQ QQQQQ QQQQ QQQQ Avg Avg Avg Avg Avg None None None None Narrow 43.58 45.03 66.71 63.15 51.82 challenges, but the stocks look incredibly cheap right now. Would you personally buy a basket of homebuilding stocks at this point? EL: Yes, but I would do so with realistic hit, and some would have violated them if they hadn’t negotiated temporary reductions. SM: Which firms are best positioned? EL: Those builders with manageable debt loads this bucket, even though it has a gigantic land position. It’s one of the only builders that can claim legitimate competitive advantage. We have recently reassessed our view of the other builders’ competitive positions, and no longer believe any of them, except for Toll and NVR, are protected by economic moats. SM: Which are you most concerned about? expectations for the near term, and I’d focus on the upper echelon. Investors are going to have to be patient even with the best names. The industry will bounce back, but a recovery will take some time. The subprime mortgage mess has deepened and extended this downturn. K Sonya Morris is editor of Morningstar ETFInvestor, on monthly newsletter that covers 150 ETFs. This article originally appeared in Morningstar ETFInvestor. Subscribe at: http://www.morningstar.com/goto/Adv37 and the least amount of land and inventory on their books are likely to survive this downturn in pretty good shape. We put NVR NVR, MDC Holdings MDC, KB Home KBH, and Ryland RYL in this camp. We also include Toll Brothers in MorningstarAdvisor.com 75
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Morningstar Advisor - Winter 2008

Table of Contents for the Digital Edition of Morningstar Advisor - Winter 2008

Morningstar Advisor - Winter 2008
Contents
Letter from the Editor
Inbox
How Do You Use the Morningstar Style Box?
Real Estate Investing Goes Global
The Golden Touch
Investment Briefs
Learning to Fly with Equity Options
Another Block in Building a Portfolio
In a League of Their Own
Unlock the Box
Fashion Change
The View from the Investment Side
Unpredictable Style
Weighting the Fundamentals
Wire-to-Wire Consistency
The Secret's Out
Focus on Financials
Strongest Homebuilders Will Withstand the Wrecking Ball
Breaking Style Conventions
Playing It Safe with Financials
Back to Bond School
Mutual Fund Analyst Picks
Undervalued Stocks
Most Popular Variable Annuities
New at Morningstar
The Style Counsel
Morningstar Advisor - Winter 2008 - Intro
Morningstar Advisor - Winter 2008 - Morningstar Advisor - Winter 2008
Morningstar Advisor - Winter 2008 - Cover2
Morningstar Advisor - Winter 2008 - 1
Morningstar Advisor - Winter 2008 - 2
Morningstar Advisor - Winter 2008 - Contents
Morningstar Advisor - Winter 2008 - 4
Morningstar Advisor - Winter 2008 - 5
Morningstar Advisor - Winter 2008 - 6
Morningstar Advisor - Winter 2008 - Letter from the Editor
Morningstar Advisor - Winter 2008 - 8
Morningstar Advisor - Winter 2008 - Inbox
Morningstar Advisor - Winter 2008 - How Do You Use the Morningstar Style Box?
Morningstar Advisor - Winter 2008 - 11
Morningstar Advisor - Winter 2008 - Real Estate Investing Goes Global
Morningstar Advisor - Winter 2008 - 13
Morningstar Advisor - Winter 2008 - 14
Morningstar Advisor - Winter 2008 - The Golden Touch
Morningstar Advisor - Winter 2008 - 16
Morningstar Advisor - Winter 2008 - 17
Morningstar Advisor - Winter 2008 - Investment Briefs
Morningstar Advisor - Winter 2008 - 19
Morningstar Advisor - Winter 2008 - 20
Morningstar Advisor - Winter 2008 - 21
Morningstar Advisor - Winter 2008 - Learning to Fly with Equity Options
Morningstar Advisor - Winter 2008 - 23
Morningstar Advisor - Winter 2008 - 24
Morningstar Advisor - Winter 2008 - 25
Morningstar Advisor - Winter 2008 - Another Block in Building a Portfolio
Morningstar Advisor - Winter 2008 - 27
Morningstar Advisor - Winter 2008 - 28
Morningstar Advisor - Winter 2008 - 29
Morningstar Advisor - Winter 2008 - In a League of Their Own
Morningstar Advisor - Winter 2008 - 31
Morningstar Advisor - Winter 2008 - 32
Morningstar Advisor - Winter 2008 - 33
Morningstar Advisor - Winter 2008 - 34
Morningstar Advisor - Winter 2008 - 35
Morningstar Advisor - Winter 2008 - Unlock the Box
Morningstar Advisor - Winter 2008 - 37
Morningstar Advisor - Winter 2008 - 38
Morningstar Advisor - Winter 2008 - 39
Morningstar Advisor - Winter 2008 - Fashion Change
Morningstar Advisor - Winter 2008 - 41
Morningstar Advisor - Winter 2008 - 42
Morningstar Advisor - Winter 2008 - 43
Morningstar Advisor - Winter 2008 - The View from the Investment Side
Morningstar Advisor - Winter 2008 - 45
Morningstar Advisor - Winter 2008 - 46
Morningstar Advisor - Winter 2008 - 47
Morningstar Advisor - Winter 2008 - 48
Morningstar Advisor - Winter 2008 - 49
Morningstar Advisor - Winter 2008 - 50
Morningstar Advisor - Winter 2008 - 51
Morningstar Advisor - Winter 2008 - Unpredictable Style
Morningstar Advisor - Winter 2008 - 53
Morningstar Advisor - Winter 2008 - Weighting the Fundamentals
Morningstar Advisor - Winter 2008 - 55
Morningstar Advisor - Winter 2008 - 56
Morningstar Advisor - Winter 2008 - 57
Morningstar Advisor - Winter 2008 - 58
Morningstar Advisor - Winter 2008 - 59
Morningstar Advisor - Winter 2008 - 60
Morningstar Advisor - Winter 2008 - 61
Morningstar Advisor - Winter 2008 - Wire-to-Wire Consistency
Morningstar Advisor - Winter 2008 - 63
Morningstar Advisor - Winter 2008 - 64
Morningstar Advisor - Winter 2008 - 65
Morningstar Advisor - Winter 2008 - The Secret's Out
Morningstar Advisor - Winter 2008 - 67
Morningstar Advisor - Winter 2008 - 68
Morningstar Advisor - Winter 2008 - 69
Morningstar Advisor - Winter 2008 - Focus on Financials
Morningstar Advisor - Winter 2008 - 71
Morningstar Advisor - Winter 2008 - 72
Morningstar Advisor - Winter 2008 - 73
Morningstar Advisor - Winter 2008 - Strongest Homebuilders Will Withstand the Wrecking Ball
Morningstar Advisor - Winter 2008 - 75
Morningstar Advisor - Winter 2008 - Breaking Style Conventions
Morningstar Advisor - Winter 2008 - 77
Morningstar Advisor - Winter 2008 - Playing It Safe with Financials
Morningstar Advisor - Winter 2008 - 79
Morningstar Advisor - Winter 2008 - 80
Morningstar Advisor - Winter 2008 - Back to Bond School
Morningstar Advisor - Winter 2008 - 82
Morningstar Advisor - Winter 2008 - Mutual Fund Analyst Picks
Morningstar Advisor - Winter 2008 - 84
Morningstar Advisor - Winter 2008 - 85
Morningstar Advisor - Winter 2008 - 86
Morningstar Advisor - Winter 2008 - 87
Morningstar Advisor - Winter 2008 - Undervalued Stocks
Morningstar Advisor - Winter 2008 - 89
Morningstar Advisor - Winter 2008 - 90
Morningstar Advisor - Winter 2008 - 91
Morningstar Advisor - Winter 2008 - Most Popular Variable Annuities
Morningstar Advisor - Winter 2008 - 93
Morningstar Advisor - Winter 2008 - New at Morningstar
Morningstar Advisor - Winter 2008 - 95
Morningstar Advisor - Winter 2008 - The Style Counsel
Morningstar Advisor - Winter 2008 - Cover3
Morningstar Advisor - Winter 2008 - Cover4
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