ucla654

Small Homebuilders: A Bargain vs. Book Value

Your presumption that "there is a margin of safety to cover any write downs" is rather understated in importance and your thesis. Just two examples:

<CHCI> is holding inventory that currently can't be sold. The Florida economy is over-speculated and suffers one of the highest property tax rates in the USA. Literally, people are selling homes for taxes now. So, if Comstock can't sell their FL inventory, they can't make their bank payments (swing loans) acquired for build-out. If they can't make their bank payments, they'll foreclose and we've reached endgame for the company, or "reorganization" (a polite corporate word for bankruptcy). In that instance the stock's market value equals nil or zero.

Similarly, <CALC> has most of their inventory in Riverside County, a disaster of double digit home price deflation. The market had previously heated up as the working class employed decided to commute several hours daily to their jobs in Los Angeles from their "affordable" home in Riverside, where they could get more space for their family than in LA for less money. Problem: gas prices + labor cuts + over-speculation = dramatic price falls for Riverside. As such California Coastal has gross inventory that can't be sold. A small portion of <CALC> inventory is on Huntington Beach. Great?! Well, now that prices have dropped, <CALC> won't be able to afford to build-out and sell the few remaining lots they're holding. Even if they could, it wouldn't be enough to balance their books. Maybe Coastal will have another huge stock dilution to cover their red ink. Maybe they'll just squeak by for at least two - three years, that will be required before real estate prices bottom.

But before then, both of these companies are extremely high risk buys.