Buy Homebuilders? No. Nein. Oxi

by: Markos Kaminis

Homebuilder shares rallied Monday on Greek relief and on the National Association of Home Builders' (NAHB) latest measurement of homebuilder sentiment. The SPDR S&P Homebuilders (NYSE: XHB) rallied 2% as the shares of individual homebuilders soared. So would I recommend homebuilders shares now? The answer is obviously no.

I covered the NAHB's Housing Market Index (HMI) in a just published article entitled, Homebuilder Sentiment Reflects Deep Depression. In summary, I noted that the HMI is 21 points below the breakeven point between positive and negative sentiment. That significant shortfall clearly says homebuilders are deeply depressed, and that says to me they should not be celebrated because of a one point gain in the HMI.

In past articles, I've noted, however, that there is an important fact that differentiates between the performance of the large well-capitalized publicly traded builders and the all-inclusive HMI. Many of the larger players have won important market share due to the failures of smaller builders left on a ledge when the real estate market bubble burst. It happens every cycle; overly levered builders gamble too deep into the cycle and go bankrupt when the market turns. That's when players like Toll Brothers (NYSE: TOL) move in and buy up high value land on the cheap; it's something TOL is especially good at.

My call on homebuilders' shares includes a good bit of art; remember investing is inclusive of both art and science. I expect many of the companies to continue to impress when they report earnings, but to also be at the whim of macroeconomic disappointments in between reports due to their cyclical nature and high-beta history. Now, while I think stocks could rally some more with the Greek scare behind us, economic data flow has been disappointing and should remain so in my view. I even think the Fed will disappoint the market this week with not enough action, and so a regular dampener strikes down at stocks, especially higher beta shares.

So, as you can see my view for homebuilders is a complex one, and I believe the shares thus offer traders a decent tool. Just look at Monday's performance of several publicly traded builders.


Monday's Gain

Ryland Group (NYSE: RYL)


Hovnanian (NYSE: HOV)


MDC Holdings (NYSE: MDC)




PulteGroup (NYSE: PHM)


K.B. Home (NYSE: KBH)


D.R. Horton (NYSE: DHI)


Beazer (NYSE: BZH)


Lennar (NYSE: LEN)


Toll Brothers


The XHB is 8% off its 52-week high, and the individual stocks shouldn't be much different. Let's put the shares' valuation into better perspective though. The XHB is still 69% off its 52-week low. A good bit of paper profits are still tied into these names, with much of their gains achieved in late 2011 (related taxes on gains already saved for those still holding, depending on age of holdings). Also, this early in the year, I expect investors will not be looking at the shares with a tax perspective if economic information spooks them.

Clearly, I'm looking at these shares a bit differently than I would value an individual stock on a bottom up selection. That's because I expect the investment community to continue to value them tightly to macroeconomic indications and real estate statistics. The news out of Europe and even China has intensified in its disappointment, and I expect the U.S. economy to deteriorate further. Also, I'm concerned about geopolitical catalysts which are especially exacerbated these days, with Iran being choked now and Syria pushing its luck. Still, despite my bearish call, I may recommend short-term pickups of some of these names ahead of the posting of their individual results. For now though, if you ask me whether to buy them, the answer is a definite no, nein, or in Greek, oxi!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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