"The economic crisis began in the housing sector and will likely end there," says Stephen Leeb. In his top-notch The Complete Investor he takes a contrary look at two homebuilders.
"Though my view may sound contrarian to a fault, a close look at the housing market, especially given recent government actions, suggests a recovery will happen sooner rather than later and be stronger rather than weaker.
"When home prices decline, buyers pull back, afraid of buying too soon. This leads to further declines and further buyer reluctance. No surprise, then, that housing starts have fallen dramatically.
"Meanwhile, consumers, who had been borrowing money based on the value of their homes, found this source of credit drying up, which dealt a further blow to the economy.
"It is a vicious circle indeed. Ultimately, though, it will almost certainly end with more willing lenders and a stronger housing market as the huge amounts of money being flooded into the system start boosting balance sheets of potential lenders.
KB Home (NYSE: KBH), whose colleagues include D.R. Horton, Inc. (NYSE: DHI) and Lennar Corporation (NYSE: LEN), reported earnings for the third quarter on Friday, and as one might have expected, they weren't the stuff of Wall Street dreams. This article gives a nice summary of the release. The loss per share worsened like crazy during the quarter compared to the year-ago data. The loss this year was $1.87 per share, and that was about four times the amount lost in the year-ago period. One thing to keep in mind, however, is that, on a non-GAAP basis in the previous year, the loss was $6.19 per share. The disparity here was caused by the addition of gains from discontinued operations in Q3 2007. No matter, expectations were for $1.22 per share for the current quarter, so KB Home nevertheless missed by a wide margin.
What fascinates me about KB Home is how the stock rebounded from its intraday low. I expected to see the shares in the dumps as I began to write this piece. Interestingly enough, as of this writing, shares are actually up over 1%! I wasn't the only one to notice this phenomenon. Dividend.com also mentioned how interesting the strong price action has been. In fact, at the time of this writing, AOL Finance says that KB Home's stock is up over 16% for the three-month period and up over 20% for the one-month period. What is this telling me? Does this mean I should buy the stock? I also should point out that the stock is not languishing at the 52-week low, either.
Well, it would have been pretty scary to buy KB Home at the 52-week low. But, I say it is kind of scary to buy KB Home now. If you think there is strength with this stock, then I say, at the very least, you've got to wait until it comes down before even thinking of buying. I just can't get myself to consider this homebuilder after seeing it miss estimates. Plus, we aren't out of the bad housing slump yet. The price action does give me pause, and I concede that you have to consider the effect of the discontinued operations on last year's earnings number. Still, it is my opinion that staying away from KB Home is best for now. The final decision, however, is yours.
Disclosure: I don't own any company mentioned; positions can change at any time.
Lennar (NYSE: LEN - option chain) shares are falling today after the company reported had significantly smaller losses in this year's third quarter this year than last. EPS missed estimates by four cents but revenues beat estimates as cost-cutting measures helped the bottom line. Even as revenues were less than half of last year's figure, the EPS went from a 3.25 loss to just 0.56 per share. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on LEN or one of the other home-builders that has yet to report.
This morning, LEN opened at $13.60. So far today the stock has hit a low of $12.95 and a high of $14.30. As of 1:00, LEN is trading at $12.95, down $0.79 (-5.8%). The chart for LEN looks bullish and S&P gives LEN a neutral 3 STARS (out of 5) hold ranking.
For a bearish hedged play on this stock, I would consider a November bear-call credit spread above the $17.50 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in nine weeks as long as LEN is below $17.50 at November expiration. Lennar would have to rise by more than 34% before we would start to lose money. Learn more about this type of trade here.
While the earnings crunch for this quarter is all but over, there is still plenty of action in the earnings arena this coming week. For instance, analysts surveyed by Thomson Financial are expecting America's Car Mart Inc. (NASDAQ: CRMT) and Campbell Soup Co. (NYSE: CPB) to be among this week's top earnings gainers.
Bentonville, Ark.-based America's Car Mart is expected to post net income of 38 cents per share (up 52.6% from the same period a year ago) on revenue of $73.8 million (up 25.8%). The used car dealer chain has tended in recent quarters toward positive surprises -- by 21 cents per share, or 73.5%, in the previous quarter. The long-term EPS growth forecast is 15%, about the same as the S&P 500. The consensus recommendation of analysts is to buy CRMT.
Campell is tentatively scheduled to report this week, and the world's biggest soup maker is expected to post net income of 25 cents per share (up 44.0% from a year ago) on revenue of $1.7 billion (up 7.5%). The Camden, N.J.-based company has just missed earnings estimates in the past three quarters. Its long-term EPS growth forecast is 7.5%, which is less than the industry average, but about the same as rivals Kraft Foods (NYSE: KFT) and Heinz (NYSE: HNZ). The analysts' consensus recommendation is currently to buy Campbell.
Are you waiting for the malaise in the housing market to finally lift? Of course you are, who isn't? I can't wait for the day when headline news suddenly turns unambiguously positive. And I can't wait for the day when the market as a whole decides to anticipate it. For now, though, we've still got sour data to contend with. According to this article, famous luxury home-builder Toll Brothers (NYSE: TOL), whose competitors include Centex (NYSE: CTX) and Lennar (NYSE: LEN), reported preliminary results for the third quarter on Wednesday that showed a big decrease in home-building revenues. They decreased 34%, coming in at roughly $796 million. Seems par for the course, all things considered.
But there are more declines. Backlog orders decreased over 50%, and net signed contracts took a dive of 35% (both of these metrics are in dollar terms). The company is also issuing write-downs that will fall somewhere between $100 million and $200 million. Depressing stats, but according to the company press release, CEO Robert I. Toll believes that there is pent-up demand lurking out there in the marketplace for homes and he used the fact that total cancellations were down during the quarter as a tool for positive spin. Plus, the home-building revenue number did, in fact, beat estimates, according to Reuters. Does this make me want to run out and buy the stock?
No. Even though the stock has been strong in the last month, and even though it was up nearly 1% at the end of the trading session on Wednesday (a pretty nice showing on an otherwise overall downer of a day), I don't think I'm ready to initiate a position in Toll Brothers. I'd have to see a significant pullback in this one before my interest becomes piqued (some better economic news wouldn't hurt, either).
Disclosure: I don't own any company mentioned; positions can change at any time.
Minyanville Professor Quint Tatro dares to share the kind of keen insight and actionable information you won't find in any prospectus. For more original thought, visit www.minyanville.com.
There are a few things I am watching for today to give me better clues as to the internal character of the market.
Wal-Mart (NYSE: WMT): It's off on retail numbers after the stock broke out of a four-month consolidation pattern on good volume. If the stock catches a bid, it is an indication that institutional investors are back stalking retail plays and would be bullish for the general market.
Energy ETF (AMEX: XLE): Energy has recently broken a longer term trend going back to mid-2006. It is bouncing off recent lows on very light volume. If money continues to rotate out of this sector, finding a home in the likes of retail, housing and financials, again a bullish sign. I initiated a short position in XLE this morning.
Financial ETF (AMEX: XLF): Financials have been and will continue to be the key to the market's future. After recapturing the 50-day moving average, this ETF is being brought down by AIG (AIG) and needs to regain its footing. Some consolidation is fine, but anything back below $20 would have me heading back towards the bunker.
Homebuilders ETF (AMEX: XHB): The homebuilders continue to perk up and also remain a key to the future of the tape. They are probing green today above their 50-day moving average on decent early volume. A break here above yesterday's high going on to attack the $19.00 level is also a bullish sign.
These are things I am watching for which will give me my clues to start wading back into the market with real capital.
(Prof. Tatro has positions in WMT, XLE, XLF, XHB).
It is going to be an interesting week. The Fed and oil will be at odds, and tempers are sure to flare on the trading floors. There are many earnings and eco reports we are looking at, and it is hard to choose which will be front and center. Traders and investors will be closely following every move by the Fed as they will be releasing a policy statement at 2:15 p.m. on Wednesday.
Also, stocks within the homebuilders group will be front and center as a few key players will share their earnings results. Have you seen the charts of these companies lately? Click for a good comparison. And after you take a peek, you may also wonder if they are actually stock charts or ski slopes. So with that as the backdrop, here are a few names that may actually be undercovered and worth a look.
Tuesday, June 24
Anything related to the automobile industry has been under siege of late, and I can't imagine how that will change anytime soon. HB Fuller Co. (NYSE: FUL) is involved in the manufacturing of the industrial performance/adhesive products for the assembly/packaging and automobile markets. The fact that the economy is lagging would lead one to the realization that, unless we see a quick turnaround of epic proportions, the reality of a lower share price will come with the next earnings release. Several down days of late have also had increasing volume, and that is not a good sign for a stock that is beginning to show signs of breaking down. Even so, First Call is showing a $0.45 per share quarterly estimate on $347 million of revenue.
Despite the fact that the challenging housing conditions are still persisting, it looks like that some major housing companies are poised to see the light at the end of tunnel. SmartMoney underlines the fact that there has been some encouraging trend for homebuilders during the past few months.
The National Association points out that, "the housing market has shown no evidence of improvement thus far," and the sentiment index is close to a historical low.
Looking at investing in housing stocks, one analyst at T. Rowe Price, Josh Spencer, makes a two-way analysis. From his point of view, housing stocks have a lot of risk if we are talking about their volatility, but they are not as risky when referring to a long-term time horizon due to their current cheap value.
It has been a tough year for investors. We have been dealing with recession fears, housing market worries, high gasoline prices and a very weak U.S dollar. As much as we would love to say that the worst is behind us, we still could be in for some more rocky times ahead. So its best to try to figure out which stocks would be best to avoid for the time being.
Richard Gibbons wrote up a nice piece over on The Motley Fool that looks at some of the stocks that we would be wise to stay away from at this time. Regardless good or bad times, he is convinced there are always ways to make money, but in order to find the winners, it is also necessary to pull out the losers.
So how can we separate out the winners from the losers?
Gibbons seems to have a simple answer for this. He believes there is really no use in wasting our time trying to separate the winners from the losers as there are so many great cheap stocks that could offer us a chance to make money. Gibbons' advice is to not choose ugly and risky companies that could put our hard earned money at risk. To makes this clear, he uses a baseball analogy, expressing his options for the curve balls instead of the fastballs.
So our all-wise representatives in Congress got together to try to come up with some kind of response to the housing crisis -- this is an election year after all -- and here's what they came up with: tax breaks for home builders.
The $6 billion package will let homebuilders use losses from 2008 and 2009 to offset income in the previous four years, rather than the usual two.
It's hard to know where to begin in describing how incredibly idiotic this is but I like a good challenge. First of all, we're giving tax breaks to companies that got into this mess because of massive over-investment and oversupply. Aren't we supposed to use tax breaks to encourage investment in areas that need further investment, not the opposite? This just makes no sense.
Why this is stupid, part two: These handouts may allow builders to avoid distressed sales which could have presented a fabulous, once in a lifetime opportunity for first-time home buyers to gain their piece of the American Dream. Instead of allowing regular people to capitalize on big business' blunders, our government has stepped in and used taxpayer money to keep the builders happy. That's stupid, and it's also wrong.
For 25 years, Steven Halpern, editor of TheStockAdvisors.com, has surveyed the leading financial newsletter advisors asking for their favorite stocks for the coming year. This article is one of 100+ ideas in the Best Stocks for 2008 report.
"Homebuilders have been in a slump, to say the least," says Jim Farrish, editor of Sector Exchange.
"The technical charts on homebuilders look very similar to those of technology stocks during their rise from 1998-2000. In fact, the index has declined more than 70% peak to trough. Looking toward 2008 and the housing market, we could start to see a turnaround.
"The start is likely to be government aided, which is why we like this as an aggressive play, as the Federal government will put more money into fixing something than corporate America. Current proposals will not come close to fixing it, but will at least put a band aid on the situation and allow the healing process to begin.
"Our vote to benefit here would be Toll Brothers (NYSE: TOL). The company has one of the better-looking balance sheets in the industry and management has done a fairly good job of dealing with this downside market.
Financial institutions continue to struggle with subprime mortgages, but the homebuilders have their own battle: tight credit and wary buyers. While builders target different markets from entry level to luxury in order to define their niche, when no one's buying, it doesn't matter. Sales aren't happening across the housing spectrum.
According to a recent survey done by Bank of America, real estate agents are all saying the same thing, no matter what part of the country they're showing houses: traffic is lower than expected, and buyers are waiting, thinking the bottom isn't here. There is anecdotal evidence that things are even worse than that.
DR Horton Inc. (NYSE: DHI) shares are rising this morning on news that the Bush administration is working behind the scenes with the home-lending industry on a plan to extend lower, introductory interest rates on home loans. Treasury Secretary Henry Paulson with loan servicing companies and other industry executives yesterday to come up with a loan modification plan in the wake of the subprime crisis. No formal agreement was announced, but an agreement could be be revealed in the next week or two. Also helping the situation are comments from Fed Chairman Ben Bernanke, who hinted at further rate cuts in December. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on DHI.
After hitting a one-year high of $31.13 in February, the stock hit a one-year low of $10.15 on Tuesday. DHI opened this morning at $10.78. So far today the stock has hit a low of $10.77 and a high of $11.99. As of 10:55, DHI is trading at $11.97, up $1.50 (14.3%). The chart for DHI looks neutral and steady, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.
MOST NOTEWORTHY: EMC Corp, Blue Nile, Getty Images and Sonus Networks were today's noteworthy initiations:
EMC Corporation (NYSE: EMC) was initiated with a Buy rating and $24 target at Banc of America as they believe the company's core business is undervalued and should benefit from penetration of new market segments. Deutsche Bank views shares of the stock as fully valued at current levels, starting shares off with a Hold rating and $20 target. Jefferies believes the divergence in valuation of core EMC and majority-held VMWare Inc (NYSE: VMW) creates an attractive entry point. The firm started EMC shares with a Buy rating and $25 target.
CIBC finds shares of Blue Nile (NASDAQ: NILE) fairly valued and sees challenges as competition increases. The firm started shares with a Sector Performer rating.
CIBC also initiated shares of Getty Images Inc (NYSE: GYI) with a Sector Performer rating, as the firm believes the company's earnings visibility is limited while the business model is in transition.
Coverage of Sonus Networks Inc (NASDAQ: SONS) was resumed with an Overweight rating and $8 target at Thomas Weisel. Their checks indicate the company is experiencing increased order activity in 2H07, and they expect an improved Q3 followed by a very strong Q4.
OTHER DOWNGRADES:
Credit Suisse Group (NYSE: CS) was initiated with an Overweight rating at Morgan Stanley.
Hovnanian Enterprises Inc. (NYSE: HOV) deserves kudos turning lemons into lemonade. This weekend, the upscale homebuilder had a "sale" where lucky home buyers could get about $100,000 in price cuts through incentives, upgrades and add-ons. Media reports indicate that it was a huge success.
Thousands of people lined up at Hovnanian developments in 19 states over the weekend for what the company dubbed as "The Deal of the Century," according to CNBC. You can bet that other home builders including Lennar Corp. (NYSE: LEN) and Toll Brothers Inc. (NYSE: TOL) took note of Hovnanian's success and will follow suit. Banks stuck with huge amounts of foreclosed properties might also start to get creative as well. It's a good sign but people shouldn't expect miracles.
While the earnings crunch for this quarter is all but over, there is still plenty of action in the earnings arena this coming week. For instance, analysts surveyed by Thomson Financial are expecting 
Minyanville Professor Quint Tatro dares to share the kind of keen insight and actionable information you won't find in any prospectus. For more original thought, visit 
Despite the fact that the challenging housing conditions are still persisting, it looks like that some major housing companies are poised to see the light at the end of tunnel. SmartMoney 
Ted Allrich is the founder of 
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