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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Application of Stock Picking Basics (2)

November 2, 2007

It is very easy to get carried away and buy stocks when the market is up to ride the positive upward momentum. But it is much more difficult to invest in declining markets. Declining markets provide opportunities to buy stocks that are oversold or undervalued. Investors need to realize the following points when investing in declining markets:

a) Make sure you have the cash available to invest in new options. This is why it is always a good idea to keep a share of your stock portfolio liquid on the sideline for major drops in stock prices.

b) Selling a stock at a loss may be necessary to get into another investment opportunity with more potential. If you think the stock you currently own can only go back up 20%, but another company has the potential for 30% gain, write down the loss for the year and make a better investment choice.

c) Keep your head up and don’t get discouraged by all the negative news because people will panic and it’s your job to find stocks that don’t deserve to be at their current valuations. Think of down markets as discounts the market is offering you.

d) Don’t just buy whatever has dropped the most, but still concentrate on what businesses have the best future growth prospects. Remember, some sectors are not very attractive markets to buy whether you’re in a bull or bear market. Right now, I feel that way about home builders and mortgage companies. Maybe a company like Home Depot (HD) would be a safer bet if you want a company that has some direct correlation with the housing market.

e) Mentioned in the Application of Stock Picking Basics (1), make sure you only invest in companies that you understand. If you don’t understand how the company makes money and will be able to increase profits domestically and globally, it doesn’t matter how much they are down.

The NYSE was down 2.6% (more than 360 points) and will probably feel some negative effects tomorrow with much uncertainty in the market. Stocks from all sectors got pummeled, and some stocks of note to take a look at that were down at least 4% are:

  1. Las Vegas Sands (LVS): -5.6% in regular session and -15.1% after hours to 106.402
  2. Peabody Energy (BTU): -11.3% to 49.47
  3. Wynn Resorts (WYNN): -4.0% in regular session and -8.3% after hours to 142.084
  4. Aluminum Corp of China (ACH): -7.1% to 68.02
  5. KB Homes (KBH): -6.4% to 25.88
  6. Merrill Lynch (MER): -5.8% to 62.19
  7. Flotek Industries (FTK): -28.3% to 36.45
  8. Aéropostale (ARO): -7.2% to 21.26
  9. Nucor Corporation (NUE): -6.6% to 57.91

There are so many stocks down over 4% today that it’s hard to pick and choose the “best” ones, but there are a lot of opportunities for investors who have the right mind set while others start to panic. Invest wisely!!