Thursday, July 5, 2007

Is It Time To Look At HomeBuilder Stocks Again?

Who wants to catch the falling knife?

The stocks are hitting 52w lows hard.... is all the bad news priced into these homebuilder stocks now? The P/E on many of the builder stocks is now under 10. All have recently reported dismal quarters. These firms are carrying a real burden in a huge amount of land based debt and bloated inventory. Using historical multiples to valuate homebuilders may be difficult when these firms are showing recent losses; valuating the firms on the basis of expected annual revenue does not improve the picture.

Is all the bad news priced into these stocks?

For those thinking about putting on a thick iron gauntlet and catching the falling blade, I would consider taking a look at some of the stronger homebuilder candidates. Ryland (RYL), Toll Brothers (Tol), and KB Home (KBH) may have the edge on some of the others due to improved inventory situations and financial restructuring. Beazer (BZH), Lennar (LEN), DR Horton (DHI), and Centex (CTX) appear to be more risky candidates. Hovnanian (HOV) is questionable due to their high debt load and impairments. This recent article outlines some of these concerns regarding HOV starting on page 3.

Builders Have Further to Fall

Beazer is in chaos recently after the firing of their Chief Accounting Officer on top of their operational issues:
Fall of the House of Beazer

The recent perspective of Citigroup on homebuilders is:
Homebuilders Slide After Citgroup Downgrade

Sometimes downgrades are sign that it is time to buy-in. There is a suddenly a large amount of negative press for homebuilders; some recent examples include:
Builders Still Have Further To Fall

Home Inventories, Land Investments Hold Risk for Builders

Suddenly it is nearly impossible to find a positive article about homebuilders. Does this mean that it is time to buy; when fear is paramount and "blood is flowing in the streets" for builders?

However as a cautionary tale - Before you rush to call your broker to place a buy order - Here is today's example of a bad call from early in 2007. This article is from a "real estate expert" on the in February states that homebuilder stocks would have "as much as a 50% pickup over the next six months" and the time to buy is "now". Of course since February, homebuilder stocks have sunk like the Titanic.
It's Time to Buy Homebuilder Stocks

Is all the recent negative press a sign that it is time to consider jumping back into homebuilders. Does the press have it wrong or right. Is it time to try to catch this falling knife?