Tuesday, June 26, 2007

Homebuilder Lennar Posts Large Loss

Homebuilder Lennar posted a massive loss today. The earnings swing between this year and the same quarter last year was an incredible $550 million downward. This is from a company that reported about $3 billion in revenue for the most recent quarter. In other words, we're quite likely going to see our fair share of homebuilder bankruptcies before it is all said and done. Mostly small and medium regional homebuilders that don't have the cash or access to capital to weather the storm. A cleansing is in order after nearly twenty years of growth culminating in tremendous excesses. I wrote on here last year that homebuilders were a value trap. There was a massive amount of money that tried to shove homebuilders higher after their precipitous fall from their peaks over the last year. That rally is over for now.

For those who find the lure of homebuilder price-to-earnings ratios of 3-4 appealing, don't look now but there is no price-to-earnings ratio because there are no earnings. For those that find homebuilders attractive because of their price-to-book ratio, here's a little known fact I haven't seen elsewhere. There is historical precedence for homebuilding stocks to lose as much as half of their book value during difficult economic environments. Did Bill Miller of Legg Mason know that when he was loading up on homebuilder stocks last year? I don't know but low price-to-book ratios are cited as compelling reasons in the article link.

Below is a long term chart of the homebuilder Toll Brothers. Toll is a company I like to talk about because the CEO sold about $200 million of stock at the exact peak in the shares while saying publicly that business was good. Maybe that is technically true but it is hard to believe he didn't see trouble ahead while dumping that much stock. It's possible he just wanted to buy a new TV and needed some pocket cash.

If you missed the exact top, there was a great entry point to short the shares with the circled crossing of two long term trend lines. Someone has a handsome profit over the last few months. The red line is simply a statistical "best fit" trend line over the last seven years. As you can see, the stock has simply returned to trend. Do the fundamentals support a "simply returned to trend"? As I said last year, homebuilder stocks will likely not reach new highs for a long time. Maybe a decade or more.


posted by TimingLogic at 8:23 AM

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