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Using the P/E Gap as a measurement for value

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Ryland Group

With interest rates remaining at historically low levels, look for the homebuilder industry to continue to put up strong numbers in coming quarters. Yes, stocks in the group have rallied, but the market put the brakes on this summer under the threat of higher mortgage rates.

Shares of Ryland (RYL) peaked at $50.42 per share. After a sharp correction, you can now buy the stock for under $40 per share. In other words, the expected macro correction has already happened here. At the same time, earnings numbers keep on surprising in a positive way. Ryland has crushed estimates in each of the last four quarters. With shares trading for 10 times 2014 estimated earnings, the stock is a bargain. I wouldn’t worry about a fully valued market here until the earnings multiple expands greatly.

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