Here's a stock that might interest you. The company, exceptionally well managed, is in an industry that has boomed this year despite the economic slowdown. Its revenue has doubled in the past four years and quadrupled in the past 10. Earnings have risen from 73 cents a share in 1995 to an estimated $6.80 in the year that ends next month up each year at an annual average of more than 30 percent.

The Value Line Investment Survey ranks the company "A" (near the top) for financial strength and "1" (among the 100 best stocks) for timeliness.

Yet the stock carries a price/earnings ratio of just 8. In other words, you can buy a dollar's worth of this company's annual profit for eight bucks. The average P/E of the Dow Jones industrials is 21; of the components of the benchmark Standard & Poor's 500-stock index, 31.

When you do the math, you find that the ratio of the company's earnings growth rate to its P/E a measure that goes by the acronym PEG is about 0.3. Anything under 1.0 is pretty spectacular. And the ratio of the company's price to its book value (that is, net worth on the balance sheet) is less than 2, while the average for the S&P is about 5.

What is this gem? It's KB Home Corp., formerly known as Kaufman & Broad, which builds medium-priced (average: $178,000) homes in seven U.S. states and France.

KB is not alone. The entire homebuilding industry is flush with highly profitable companies trading at single-digit P/E ratios.

Like KB, Centex Corp., the largest publicly traded homebuilder, has notched seven straight years of powerful earnings increases. It was trading Thursday at a P/E of 7. So was Toll Brothers Inc., a builder of upscale detached houses, townhouses and condos with a profit that has risen every year since 1991. So were Ryland Group Inc., with operations in 295 communities, mainly in the South, and MDC Holdings Inc., which builds more expensive homes, averaging $250,000. Beazer Homes USA Inc. is even cheaper, trading at a P/E of 6.

With few exceptions, homebuilders' stocks have been hammered since spring. Ryland, Toll Brothers and D.R. Horton Inc., for example, have each fallen by about one-third.

Meanwhile, sales of single-family homes keep soaring up 14 percent from last year. The National Association of Homebuilders expects record sales this year.

Why do such good companies carry such low prices?

First, many investors are worried about a "bubble" in real estate like the bubble in technology stocks in the late 1990s. But while house prices have certainly risen sharply, the increases have been localized. One study found booming, and possibly overvalued, markets in a handful of areas, including Boston, San Diego, San Francisco and Miami. The latest figures also show home prices rising at an annual rate of more than 20 percent in New York, Washington and a few other areas.

But nationally, Celia Chen of Economy.com writes, "the pace of house price appreciation is abating slightly, giving hope that house prices are heading toward a slower, more sustainable rate of growth."

Overall, U.S. house prices are up at a pace of 7 percent this year, or about 5 percent after inflation, following an increase of more than 6 percent last year the biggest jump in a quarter- century. During the 1980s and 1990s, house prices stayed only a percentage point or so ahead of inflation, so 5 percent is a big jump. But does it constitute a bubble?

House prices are rising for good reasons. In many areas, new regulations to protect the environment and discourage sprawl have made it difficult to get building permits, restricting supply. Meanwhile, demand is rising. Including immigration, the United States is expected to grow by close to 2 million households annually. To put that number into perspective, fewer than 1 million new homes will be sold this year.

Demand is also strong because mortgage rates are so low an average of just 6.2 percent for a 30-year fixed-rate home loan. And while the economy is far from robust, unemployment remains below 6 percent, and personal incomes are growing at a decent pace.

But if there is no bubble, why are homebuilders' stocks so cheap? The main reason is that they are viewed as "cyclicals," and investors bestow significant discounts on such stocks.

A cyclical company is one whose earnings are at the mercy of the ups and downs of the economy. Because investors are wary of cyclical stocks, knowing that a downturn in the economy will depress or even obliterate their profits, their valuations tend to decline in times of high earnings. Which brings us back to homebuilding. Traditionally, it has been a cyclical enterprise, demanding a cyclical P/E ratio. But is it really?

At random, I pulled up the page of research that Value Line provides for Lennar Corp., a homebuilder founded in 1954. Since 1986 (the earliest date on the Value Line sheet), Lennar's earnings have gone from 48 cents a share to $6.01, rising in 13 of those 16 years. For KB Home, the figures are about the same only one year of declining earnings out of the past 11. Just to be sure, I looked at earnings over the past 10 years for the 13 largest publicly traded homebuilders. There were only two losses out of 130 "earnings years."

Certainly, the supply-demand environment has been delightful over the past decade. That could be a fluke. But management has also improved. Homebuilding has traditionally been a fragmented industry, with thousands of small companies spread across the country. That is changing (though the top 10 homebuilders still account for only 17 percent of the entire market), and it is bringing smarter financing practices and tighter cost controls to a seat-of-the-pants business.

Just look at a company like NVR Inc., which builds homes under the trade names Ryan, NV and Fox Ridge. Since it went public in 1994, NVR has increased its earnings per share every year, from 53 cents to an estimated $35.40 for 2002. Over the past five years, earnings growth has averaged 72 percent annually, though Value Line projects a decline to merely 31 percent for the next five years. Its P/E is 10.

Such a combination of high growth and low price seems almost too good to be true, and it is important to recognize the risks. Almost certainly, interest rates will rise in the next few years as the economy recovers. The question is whether higher incomes and a more optimistic outlook will trump higher mortgage payments. Another risk is that competition among homebuilders will get tougher as consolidation increases.

Still, some of the smartest bargain-hunters in the business remain excited about homebuilding stocks. John Buckingham, editor of The Prudent Speculator, which the Hulbert Financial Digest ranks the top newsletter for returns over the past 20 years, recommends Beazer, Centex and Horton stocks which, unlike KB and NVR, have fallen in the past year. Each trades at close to book value.

[Posted with permission of author]