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PeakTrader said...

Why U.S. home building stocks look cheap
Mar. 04, 2011

1. Pent-up demand.
2. Fed focus on unemployment.
3. Inflation hedge.
4. Population growth
5. Housing stocks still out of favor (pessimistic sentiment).
6. Home builders in better shape (balance sheets best shape in years).
7. Mean reversion.

Balance sheets:

William Mack, a former Standard & Poor's equity analyst who now manages individual investment accounts. “The average builder has cut its net debt by roughly $1-billion since 2006 peak levels” through lower inventories, reduced operations, tax refunds and secondary share issuances.

The process of writing down land holdings appears just about complete. In fact, Mr. Mack says, the majority of existing land inventories now consists of land purchased in the past two years at relatively reduced, or distressed, prices.

Many of the smaller builders went out of business during the recession, leaving the larger builders to benefit disproportionately from any upturn.

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James said...

Peak,

Of the 12 homebuilders covered in the Valueline standard edition 6 (bzr, hov, kbh, mdc, joe, tol) are projected to post a loss and 6 (dhi, len, nvr, phm, ryl, spf) a small profit for 2011. My finance professor proposed three rules by which to judge an investment: 1) more is better than less, 2) sooner is better than later, and 3) certain is better than uncertain. The homebuilders look like a poor investment on all three rules. It is too early to bet on employment. Besides unemployment improvement in coming months will be from removing people from the workforce rather than job creation. That will be no help to new home sales. Pent up demand will be covered by homes in or on their way to foreclosure. These stocks are dead money for one or more years. A better bet would be the REITS. Those people losing their homes to foreclosure will have to rent.

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PeakTrader said...

James, that may explain why your finance professor is teaching.

Here's a few investing tips:

1. It's the information you don't know that's most important.

2. When a stock is consolidating, there's little risk, and you can make money trading a range, until it breaks-out, which can take years.

3. A quality stock with a small market cap, e.g. $1 billion, can double faster than a large market cap stock (or in the case of small biotechs, and other small techs, can spike several hundred percent in weeks or even days).

4. Inherent quality and the future economy mostly determine stock prices.

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Also, government intervention in housing market and light bulbs:

http://www.blogger.com/comment.g?blogID=28997633&postID=8562847846523481833