Stay Away From Homebuilders

November 21, 2007

On October 9, I wrote an entry to tell people to stay away from airline stocks. Since then, both China Southern Airlines and China Eastern Airlines (CEA) and China Southern Airlines (ZNH) are down 30%. Other airline stocks mentioned by tao2death like US Airways Group (LCC), UAL Corporation (UAUA), and AMR Corporation (AMR) are down between 20-33% since that time. Of course, a lot of stocks are down because of the declining market, but oil is closer to $100/barrel since then and there have been no legitimate talks of a UAL/Delta merger that would help the entire airline industry.

My next advice would be to stay away from homebuilders. We all have been aware of the subprime fallout, credit crunch, and the slowdown in the housing market. Analyst aren’t entirely sure of when the housing market will stabilize and bottom out and many have been forecasting middle to late 2009. A CNN Money article states that some homebuilders could end up bankrupt and while homebuilding was reaching 2 million homes/year in 2005. That homebuilding rate is poised to be about 1 million homes/year in 2008. That does not bode well for US homebuilders like Hovanian (HOV), Pulte Homes (PHM), D.R. Hortan (DHI), and Beazer Homes (BZH). Beazer Homes also suspended their dividends earlier this month and laid off 25% of its workforce. Even historically stronger housing stocks like KB Homes (KBH) and Lennar (LEN), which sports over 4% dividends, are down 62% and 82% respectfully from their yearly highs.

When the 3th largest home builder by market value, Pulte Homes, hit $15/share (57% drop from their yearly high) all throughout October, I was contemplating that it might be a chance to pick up some shares of this discounted home builders. Since then Pulte has managed to drop down to today’s current price of $9.50.

Pulte CFO Roger Cregg is selling over 150,000 shares of the companies stock at less than $12/share and if you own housing stocks, maybe you should too. If you’re fortunate not to have any holding in this sector, make sure to stay on the sideline for the time being. Houses are losing value all across the country and homebuilders are piling on huge incentives for people to buy houses. Buyers are spooked to buy a house, mortgages will be harder to obtain, and people seem to be more willing to rent in the immediate future. To me, it looks like a bleak time where nobody knows where the bottom is and for some of these homebuilders, there might never be a recovery for them.

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Book Review: The Standard & Poor’s Guide to Selecting Stocks

October 4, 2007

The Standard & Poor’s Guide to Selecting Stocks by Michael Kaye is a very solid book that focuses on the basics of stock screening. Various stock screen will yield various type of investing options depending on what one is looking for (ie growth, value, dividends, momentum, etc). Be aware that stock screening allows investors to find a list of stocks based on various financial parameters (forward P/E ratio, cash flow, market capitalization, return on equity, etc) input by the user, but does not mean that every stock returned from the screen is a winning investment option. Kaye emphasizes that screening for stocks is the first step in the investment process and should be used as a tool to keep investors informed on what options they have.

One thing I found really interesting in his screens is that in his investment screen for GARP, growth at reasonable price, many of the companies that were derived were housing stocks like Hovanian (HOV), Toll Brothers (TOL), The Ryland Group (RYL), Pulte Homes (PHM), and Centex Corporation (CTX). Some of the screening parameters included a PEG ratio of between 0 and .75 with a return on equity of at least 20%. These housing companies are nowhere near their highs from years back and still are looking for a bottom so this is an example that stock screens need to be properly evaluated even if they look like good investments at the time. Another interesting screen looked for value stocks that have a high rate of insider purchasing. One of the ten stocks returned from that screen was Las Vegas Sands (LVS) and the price was at 42.85 at the time. Holding until today would have yielded a 300% gain so sometimes it really is worth taking a gamble but using a stock screener can help allow you to take a calculated gamble while lowering your risk.

Amateur investors or experienced investors can get a lot from this book.
a) Beginners: They will find a way to learn about companies that meet their investment themes, and decide whether the company is worth researching more about.

b) Experienced: These people will already have stock investments in mind and stock screening can allow one to find out if there are better investments available. Screening needs to be done continuously, whether it’s on a weekly or month basis, because stocks that are returned from a screen will always be changing.

Things to try on your own after getting this book:
1) Based on Kaye’s stock screens in late 2004, see how the stocks returned from the screens are doing currently
2) If you like a particular stock screen, put some of the financial inputs from his stock screen to see what companies would turn out today

Overall grade: A-
I didn’t read through chapter 11 (screening for mutual funds) or chapter 12 (screening for bonds) as my main focus was to learn about screening for stocks. The first 100 pages of this 229 page book gives a very comprehensive overview of various stocks screen with many examples of each type. Again, use this book as a tool for investing and not as a magic list of stocks.