No Missed Chance with Homebuilders

The Kelly Letter has been watching certain homebuilder stocks since last summer. With their recent recovery, some people have written wondering if we missed our chance to buy.

Well, we certainly missed a chance to buy, but I'm not sure it was the last chance. Homebuilders face big challenges, and they've been head-faking everybody for half a year now.

The one I'm watching most closely dropped to $13.50 in early October and then rose 29% by early November. "The train has left the station," went the refrain in notes I received back then, "and you missed it!"

The stock then dove 31% in the following three weeks, rose 48% in the next three weeks, dropped 60% in the next month, and is now up 105% in the last week. There were lots of trading opportunities to be sure, but I'm watching and waiting for the long haul gain and want more confidence before committing my subscribers to that.

Anecdotally, I've been waiting for a major bankruptcy in the group to signal that a bottom is near. We haven't had that yet. According to an article in Tuesday's Financial Times, we may get it soon:

The risk of bankruptcies among the big U.S. homebuilders has risen sharply as the economy has weakened and an end to the housing slump remains distant.

Credit default swaps on homebuilders, which act as insurance on corporate debt, suggest some of the biggest are at risk of failing to keep up debt payments. According to Byron Douglass, an analysts at Credit Derivatives Research, the most exposed are Standard Pacific (SPF), Hovnanian (HOV), Beazer (BZH), and Meritage (MTH). All are among the top 15 publicly-listed U.S. homebuilders.

Mr Douglass said bankruptcies were "highly likely" among top homebuilders. Homebuilding is viewed as being the sector most threatened by the slowdown as housing has been the worst hit part of the economy.

Defaulting on debt is "in most cases coincident with bankruptcy," said Robert Curran, an analyst at Fitch Ratings.

-- Full article

It seems that patience may pay for now.

Comments

[Georealist]

Either "patience" pays or it doesn't..it "probably" pays means you either are torn between investing currently or not..or you just don't know. Since it's the primary season, I vote for the latter. You're going to wait for ONE bankruptcy..or multiple..or "probably" in between?? Your LETTER must be a delight to read.

[MichaelDavey]

Yeah, talk about whipsaw and popcorn machines. Interestingly though, the industry group there has risen nearly into the top 25% of 197 ranked groups by IBD. I wouldn't invest in any of this, but I've keyed trading long now instead of short, beginning this month. On the side at the moment, but I know what those stuck short are thinking and feeling at the moment; I'm trading in on every slice lower until it stops working. Thanks for the article.

[gordon]

We work for Lennar primarily.If not for the Merrill deal, they would be in big trouble. Cash flow means several will fail if they don't mothball operations. Adding inventory is suicide. Inventories "dropped" is HYPE by media, that's because sellers are pulling of the market for "better days or more gov't intervention in the "free" markets. This will prolong the enevitable foreclosures. In Calif 1990-1994 our home dropped over 30%, WHO RESCUED US???? It should be criminal, this intervention.

[WAKEUP]

I am constantly amazed by all this back-and-forth, about "homebuilders.&qu... "Homebuilders" are a major element in the financial shell-game that has created the current sink-hole in the American economy. "Homebuilders&quo... can be counted on to do more "head-faking,&quo... as they seek to extricate their asses from the crack they have gotten pinched into, by their relentlessly greedy actions, taken in league with bankers and other financial types. Look for "homebuilders&quo... (Read: Company Executives)to take the money (if there is any of the stuff left in their respective companies), and RUN.