Stocks can tell you the direction of the economy. That's why it pays to check out their charts regularly and listen to the conference calls. Economic disasters don't just happen over night. They take years to develop and individual companies can alert investors long in advance.
The homebuilders are such a group. They warned investors off housing well before that market crashed. The group peaked long before the Great Recession. If you had looked at their charts, you'd have seen the share prices going down a year before home prices sank. They were an extraordinary leading indicator to the coming housing debacle.
Much as been made about those who were savvy enough to recognize that housing was crashing. But you didn't have to be brilliant to see it coming. None of the builders was quiet about the impending catastrophe. Their conference calls were bleak, keying you in on the disaster ahead.
Fifteen months into the current slowdown, we may be seeing a floor in some markets where deposits and traffic although erratic from week-to-week, seem to be dancing on the bottom or slightly above that...As we previously announced, this quarter's results were negatively impacted by a higher than normal 585 cancellations. With these cancellations creating unintended specs, we could face increasing margin pressure as we seek to move these homes.
It is now clear that the selling season did not materialize this year and our disappointing sales results and elevated cancellations have caused us to have an increasingly cautious outlook.
The builders were all saying the same thing, and if you'd listened, you'd have seen the housing crash a year or two earlier. The cadence of the builder conference calls for a year leading up to the Great Recession was so negative that it is hard to imagine anyone owning them after listening to the reports.
The gold miner stocks also presaged the decline in gold (GLD) prices. Their share prices began dropping long before gold itself declined.
The big difference between the miners and the homebuilders: You didn't get the pessimistic tone from the miners. Rather, the gold miner calls were quite upbeat considering. For example, Goldcorp's (GG) CEO on the Q3 2012, call:
I'm pleased to report that improved operating performance in the third quarter, combined with strong realized gold prices, resulted in Goldcorp's highest quarterly revenues ever, totaling $1.5 billion.
The gold miners conference calls didn't suggest the direction of gold. Only their stock prices did.
In contrast, the homebuilders conference calls gave investors very useful information about the sector and tipped investors as to the direction of housing. The homebuilders told it like it was. When things were awful, they didn't hold back. What are the builders telling investors now?
The homebuilders are very bullish about the future.
Per Toll's most recent call:
Buyers who have been on the sidelines for six years are jumping in. Low interest rates, improved customer confidence, a strong stock market, rising home prices and a reawakening economy are stoking demand in our luxury market.
One year ago, we were somewhat reluctant to raise home prices for fear of crimping demand. Now we are finding that in many markets as prices increase, a sense of urgency takes hold and demand continues to rise.
DR Horton is equally enthusiastic about their prospects in their most recent call.
Overall, the first half of fiscal year 2013 was nothing short of phenomenal, and we expect the second half to be even better.
In conclusion, as I reflect on the current positioning of Lennar and the state of the current housing recovery, I could not be more optimistic about our future.
The homebuilders tell it like it is. When the industry was beginning to deteriorate, they warned investors off their stocks. Now, they are trumpeting the good news. The group is believable and should be bought.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.