Why I'm Buying DR Horton as a Trade

I don't believe in any homebuilder recovery. I don't believe in these stocks. I don't believe in the Kool Aid. That said, I don't need to believe... I just need everyone else to believe.

I have 10% of my portfolio open for "trading" positions, of which I am going to throw this purchase of DR Horton (DHI) in, along with DryShips (DRYS). Why DR Horton? Nothing specific. It could of been Toll Brothers (TOL), Pulte Homes (PHM), Lennar (LEN), blah blah. I am staying away from the worst of breed, Hovnanian (HOV), Standard Pacific (SPF), and the like simply because they are truly junk, but they could of course go up the most. Instead of buying an ETF to buy a basket, I just bought 1 representative stock - they all act the same since people are not differentiating.

DR Horton is down 19% in 2 sessions, when we were in full Kool Aid mode. At some point in the next few weeks, we will be back in full Kool Aid mode. I'll set a sell price at $17 or so to offset my purchase today @ $14.25. That would be a 20% gain. Downside risk is a return to the $10.50s-$11s, but I'll still keep the position because at this point bad news does not push these stocks down - people are convinced they are early cycle plays so when the market goes happy, these stocks bounce. So even if it breaks to $11, it will bounce back at some point, so if this one goes against me in the short run I will just sit on it and wait for happiness to return to Oz.

Again this is a pure trade, and a "yin" to my normal "yang" in terms of portfolio holdings. Any bond insurer bailout, Buffet happiness or government bailout will send this type of stock screaming. Not that I agree with those theses but one only needs to observe. Go forward I plan to trade "a" homebuilder stock on and off until maybe 18 months from now when the real homebuilder rally should begin... when the stock shoot up in anticipation of the bounce in home purchases.... of 2011. Until then, I'm going to act like a pure trader with these names. When they fall, buy - when Kool Aid flows, sell. Repeat.

Last, the risk with any of these is the market finally looks in the mirror and sees the truth, but no trade is without risk and I won't sell this at a loss, because I am of firm belief that when the market rallies (even from a meltdown) people will again run to this type of junk early cycle thesis. Again, not my typical fare nor my typical strategy, but this is simply put a traders market, nothing else. So I am putting on this trade, while waiting for the market to either break out or break down (I am betting on breaking down)

I bought 2000 shares for a 2.5% stake in the $14.20s. I'll be gleeful to pass this along to some Kool Aid bull (or hedge fund computer) at $17.00 sometime in next weeks/month or two.

Disclosure: Long DR Horton in fund and personal account

Comments

[Leo S]

You are bold. We see things pretty much the same. Rather than take that risk, I've put a portion into high-dividend (8-11%) telecom stocks and AYR. I remain uncertain about the latter.

[ty]

i personaly think that right now the sectors to be in are retail and financials well at least in a few months. you said that spf was part of the worst breed but they had a lot of wright downs and i jus doubled my money with spf. well i guess its all preference

[ty]

lol i mean write*

[TraderMark]

ty congrats on your trade in SPF
This is a crazy market where almost no company is allowed to go bankrupt. If the banks ever pulled the plug on SPF and not change their terms they would of been out of business. Same goes with a few other home builders. Frankly I am not sure if there is some mandate from "up above" not to let these guys fail or if there is just so much liquidity out there that banks are willing to keep extending new and variable credit to these homebuilders (the latter would make little sense considering the credit crunch)

Ty, I'm worried about retail. Consumer is crunched and inflation is high - not something that retailers of discretionary items want to hear. I'd be cautious but like financials and homebuilders we'll see big rallies from time to time so if your timing is good you might nail some great rallies (which will be sold off in my opinion soon thereafter)

Leo, in a better market I think this would of been a better trade (DHI was actually up today somehow) :) In this market, unfortunately, the market itself seems to dictate the price action of many stocks. This individual position is what I consider a big risk but its not a huge part of the portfolio so we'll see where it goes. I am not worried about them going bankrupt unlike some of the lower tier names, so if nothing else its going to be a paper loss and sideways action for a while. Sometime in the next 2 months I am sure we will get a "housing will recover within 6 months" rally and even if its a bad short term trade it should work out in the longer run. Big picture I think the easy money in housing has been made and we'll have a lot of hopeful rallies over the next 2 years before a real turn in the housing market happens. Until then, they can be traded I suppose.

[TraderMark]

that should of read
"big picture I think the easy money in SHORTING housing has been made"
I expect a lot of sideways actions punctuated by the rallies whenever people figure a housing recovery is imminent. This should continue for a few years, until it is finally true. But hard to see them going down another 50%.