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Ugliness for the Homebuilders

|Includes: DHI, PulteGroup, Inc. (PHM), XHB

On the new multi-year lows list today, PulteGroup (NYSE:PHM).  Since a negative reaction to an earnings report by competitor DR Horton (NYSE:DHI), PHM shares have been in a free fall, hitting their lowest levels since 2000.

I don't want to delve too deeply into an analysis of the fundamentals of PHM, as they are fairly complex and I'm not an expert on this company/sector.  In the recent earnings November earnings report, revenues and orders fell while average selling price rose.   Taking a look, the company apparently is still losing money, has significant debt (although this is common for this sector and may be being restructured), and doesn't pay a dividend.

The stock holdings and short interest may be of interest to some traders.  The short interest as % of float was over 18 at the latest reporting, giving a short interest ratio of near 6.  The company has a float of around 336 million shares, 382 outstanding.  William Pulte is by far the largest holder, with 32 million shares owned.  But another significant holder is the Fidelity family of funds in the latest reporting, with Fidelity Magellan fund holding the biggest portion.  5 big Fidelity funds, including Magellan, owned about 35 million PHM shares -- and FMR (the Fidelity parent company) in total reported owning 51 million shares.  This is purely speculation on my part, but perhaps FMR is bailing on some PHM shares this month, causing the stock to hit new lows?

You can see on the first chart below that PHM shares were basically in a narrowing range since 2008.  In particular, the breakdown of the higher lows trendline in June of this year now seems to have preceded the further accelerating breakdown in the stock that we've seen this month. 

PHM Weekly Chart

PHM is one of the top 10 holdings of the SPDR Homebuilders ETF (NYSEARCA:XHB), yet it's performance has greatly lagged that of XHB with the recent downturn, see below.  This indicates that this may be somewhat of a company-specific problem that has not affected all the others in this broad sector (I advise to check the top 10 holdings of XHB and do your own research on this).

PHM vs XHB 2010 Performance Chart

Stepping back even further to the long-term Monthly chart, you can see below that PHM shares have made a full "round-trip" back to the levels of the year 2000.  Previous to 2000, the shares traded from 1975 to 2000 in the 0.01 to 6.00 range (presumably split-adjusted).

PHM Monthly Chart

Bottom line:  If I was a long-term holder of the shares, I would be very concerned by the breakdown this year, especially relative to its sector ETF.  Keep an eye on short interest and institutional activity in the stock. Personally, I would look to unload long shares on a rally to the 8/9 area.  It doesn't appear likely to me that this stock could go to zero at this time -- it has traded at or below these levels in the past for some time.  A big rebound in the new housing market and/or some strong restructuring gains/maneuvering by the company (including recent acquisitions) could change its fortunes.

Disclosure:  No current holdings in the stock or its options.

Disclosure: No positions.