Are the Homebuilders Overvalued?

After celebrating the turnaround in the housing, let’s look at some of the housing stocks. The inventories are at the rock bottom and there is pent up demand in the market. We will get deeper insight when 6 Home builders report their quarterly earnings in the coming week. So should we dip our toes in to profit or pull our money out?

ITB

Not really my dear friends. Overall, home-builders have dramatically outperformed the stock market in the last year. Pulte Group (PHM) shares have nearly tripled in price; And Ryland (RYL), Standard Pacific (SPF) and MDC Holdings (MDC) have doubled in value. As a matter of fact shares of Lennar (LEN) rose 97% and DR Horton (DHI) increased by 57%. But one thing to remember is – PulteGroup fell 69% in 2007, Lennar lost 66% in 2007 and then 52% in 2008, and DR Horton stock declined 50% in 2007 and 46% in 2008.

As Lombard Street Research analyst Melissa Kidd notes, home-builders’ profits have actually risen faster than their prices, and their net profit margins are higher than pre-crash peak levels. Let’s look at the gross margin.

GrossMargin_HB

As you can see that the gross margin of the giant Pulte and the whole sale builder DR Horton are at their pre-crash levels. But the operating margins are not there yet.

OperatingMargin_HB

All these recovery in the margins and the earnings are sans the fact that home prices are up by just 7% Year-Over-Year. Most of the analysts might concur that the recent stock price rise have all the earnings rise (see below) and the future profits baked in.

EPSchange_HB

Let’s analyze some companies whose stock prices have sky rocketed in last few months.

Even after PulteGroup’s run-up, its price-to-forward-earnings ratio is 17.7, according to FactSet; revenue for 2012 is estimated at $4.7 billion, while this year it’s expected to climb to $6.1 billion.Meanwhile, Lennar’s stock is trading at 23.3 times forward earnings, with its financial year 2012 revenue of $4.1 billion estimated to grow to $5.4 billion. It’s a similar story for DR Horton, which has a price-to-forward-earnings ratio of 21, and is expected to see its $4.4 billion FY2012 revenue grow more than 25% to about $5.6 billion. Let’s look at the historical PE comparison.

PE_HomeBuilders

Juxtaposing all the premium home-builders in US, it is easy to conclude that the mean P/E multiple was around 10 before the boom and the bust. But now the scenario is different. Even though we are far off from the peak of new home sales of 1.3 million in 2005, the new home sales are growing at brisk pace in last 5 quarters. Expectations for housing starts and new home sales are both in the 20 percent range for 2013. So a forward P/E of 23 for a growth in excess of 25% is acceptable.

Recently Lennar announced its earnings.  The Florida-based builder crushed estimates as fourth-quarter earnings more than tripled on 42% higher sales. Lennar’s new orders rose 20% and its order backlog was up 35% as of November.  Lennar CEO Stuart Miller said in the company’s earnings announcement that the housing market is stabilizing, “driven by a combination of low home prices and low interest rates, making the decision to purchase a new home more attractive.”

Similar expectations are for DR Horton and Ryland homes. The 24 analysts polled by Thomson Reuters expect Horton to report fiscal first-quarter earnings per share of 14 cents, a 56% rise from last year’s 9 cents. Sales are seen advancing 21% to $1.1 billion. Ryland is forecast to report a huge jump in Q4 EPS to 49 cents, up from 2 cents a year ago. Revenue is projected to grow 55% to $404.4 million.

“Just because the stocks are overvalued doesn’t mean they are not going to go up more,” says David Goldberg, a housing analyst at UBS. “It’s a momentum play.” Goldberg warns, however, that there is a lot of growth baked into these stock valuations for 2013, expectations that may be tough to meet. This uptick might not be at 45 Degree angle and might have pauses but the time is not to cash out of them.

Let’s hold onto them and add some more during pullbacks. So which are the companies that are worth adding to the portfolio. Based on the operating margins, earnings growth and PE ratios (historical, TTM and Forward) I believe Lennar and DR Horton are the best of the pack. I would also like to mention TOL. But please don’t buy anything now. Be patient and wait for pull back to 50 DMA. Why DHI and LEN? We will talk about it in the next post.

Lastly, if you don’t feel comfortable buying these home builders, you can own the Home Builders ETF (ITB). Another way to play housing recovery is by buying companies such as Home Depot (HD) (re-modeling,  new home set up etc.), Sherwin-Williams (SHW) (Paints), Tronox Inc (TROX) (Pigment for paints) and Corelogix (CLGX) (Mortgage related information provider).

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BREAKING OUT – 01/25/2013

With the bull still wild, we have another good set of promising breakouts.

TPX

Before we go anywhere let’s look at a breakout we talked about yesterday. Interestingly, GAAP EPS of $0.39 for Q4 were 54% lower than the prior-year quarter’s $0.84 per share. For the quarter, gross margin was 50.0%, 210 basis points worse than the prior-year quarter. Operating margin was 15.0%, 840 basis points worse than the prior-year quarter. Net margin was 6.9%, 850 basis points worse than the prior-year quarter. Decreased 7.01% to $342 million from the year-earlier quarter.

But it did one thing right – The EPS of $0.60 a share, beat the $0.55 average analyst estimate. Revenue of $342 million also beat the $339 million estimate. Result-

TPX

The surprise of the day is a break out of good ole Proctor and Gamble. Earnings is the driver for this BO. Kudos to the management’s effort, the Adjusted gross and adjusted operating margins popped 110 basis points to 51.2% and 20.0%. Underlying second-quarter sales ticked up 3% year over year–on top of a 4% increase in last year’s second quarter–including a 5% jump in baby and feminine care, 4% in health care, and 3% in fabric and home care.

PG

CHUY: Fast growing TexMex joint broke out today. But there is a road bump right ahead. I entered it at $26.4 today.

CHUY

HAL: Been a long time favorite of mine – Halliburton. It broke out today. I have owned it since it’s early 30s. I would wait for some consolidation before entering now due the run up it had in last two months.

Today’s BO was due to better than expected earnings. All three of Halliburton’s international regions and 8 of its 12 product lines set new revenue records. Sequentially, the Middle East/Asia region increased revenue 14% to $1.2 billion, and in the Europe/Africa/Commonwealth of Independent States region, revenue increased 8% over the same time frame to $1.2 billion as well. Overall, Halliburton’s international operating margin improved to 17.6% from 14.6% in the prior quarter. But the picture was exactly opposite in US. The revenue dipped 5% sequentially to $3.8 billion while adjusted operating income declined 22% over the same time frame to $465 million. The operating margin for the region declined to 12.4% from 14.1% last quarter, still above Baker Hughes’ BHI 8.7%. Overall the revenue was up 3% YoY.

HAL

Other key breakouts have been – PCLN (Priceline), ROSE (Rosetta Resources – Need to compare this with CLR), TEX (Terex), THO (Thor Industries) and CPWR (Compuware – a prime recruiter in Detroit Area.)

Break Out Watch List – KORS, JOBS, ISRG, MDVN, CTRX, LL and LNKD.

Lastly, what happens when you miss the estimates by miles –

SCSS

Analysts polled by FactSet expected the company to earn 32 cents per share on revenue of $229.8 million.

Net income fell to $12.5 million, or 22 cents per share, for the period ended Dec. 29. That compares with $15.4 million, or 27 cents per share, in the same quarter last year. Select Comfort’s total revenue increased 17 percent to $220.6 million. Select Comfort expects to earn between $1.65 and $1.80 in fiscal 2013 fiscal. Analysts forecast $1.89 per share.

Well, you get pummeled!

SCSS

I initiated a short at $23.5 with stop at $24.5. Now I will close it at $21. This being a bull market. I think any short is a risky proposition.

BREAKING OUT – 01/24/2013

LL (Lumbar Liquidators), OSTK (Overstok.com – bought my rug from here), NFLX (Dont tell that you dont know this name) and FFIV (aha! its a buy again).

Latest update on breakouts:

NFLX (Dont tell that you dont know this name) – The shorts are been squeezed to death leading to massive jump in price. Again if market corrects, this stock might come down to $130 to $135, an entry point for aggressive speculators.

Netflix added 2 million subscribers to reach 27.2 million at the end of the year. The company’s overall EPS of $0.13 was well ahead of the consensus estimate calling for a $0.07 loss and the beat was driven across all three units: domestic streaming, DVD rental (subscriber declines decelerated), and the international business posting a loss of $105 million (slight beat). Longer Term I think we are looking at up to 40 million subscribers.

FFIV (aha! its a buy again) – I entered today again at $104 with trailing stop of 9%. I have been in love with this company from it’s hay days or my hay days. The reason is simple – right place right time. Ever heard of BIG DATA – data from non-sense blogs like the one one on which you are, cursing on twitters and youtube. All these data need to go through networks and someone needs to manage those networks be it internet, cable or phones. This is were Force Five comes into play. It has excellent product pipeline to manage and monitor networks be it private or public. Moreover the company ensures that it keeps ramping up its pipeline. Lastly, the management is excellent and thus the company has been taking market share from CISCO.

F5 Networks reported revenues of $365.5 million in the reported quarter, up 13.4% from $322.4 million in the year-ago period. Reported net income was $69.5 million or 88 cents per share compared with $66.5 million or 83 cents a year ago.

Other interesting breakouts –

OSTK (Overstok.com – bought my rug from here), TPX (Temper pedic Matress maker – pre earnings bulls are at work), IRBT (iRobot – Have you seen Roomba vaccum cleaners at Costco that drive your dogs insane?), ERJ, AVT and MEOH.

TPX – With Sealy in its back pocket it has both Spring and Memory foam on offer but my favorite still is SCSS (earnings after close today).

OSTK, ERJ and AVT are technically the cleanest breakouts. I will write about them later tonight.

Breakout Watchlist:

LL (darn it!! – bluffed today morning), CLGX, CHUY, KORS, JOBS, GOOG and ISRG.

Now the market is overbought. So do you still buy any of the above. In last 5 years of churning stocks, I learned that stocks breaking out due to good earnings report (surprise!! surprise!!) or part of industry group leading the bulls tend to go sideways with correction of 1.5 times the market correction.

I will keep yo’ all posted with more breakouts. Have an excellent day!!!

Housing – The Return from the Ashes!!!

One of the pillars of American economy “The Housing Market” is showing the signs of resurgence. The year 2012 was a promising one for housing. With consistent improvements in housing construction and prices, home building is starting again to contribute to the economy.

But before delve deeper into the housing industry let’s paint a picture of the economy.

Jobs

The jobs market continued to recover slowly but surely.

JobReport

Talk about steady: The U.S. created, on average, 153,000 non-farm jobs each month over the course of 2012; the U.S. also averaged 153,000 non-farm jobs a month during 2011. The unemployment rate has slowly improved, falling to 7.8% at the end of the year, but the labor market remains far from booming.

GDP

GDP

GDP in lay mans terms tells you how fast the economy grew. At a high level  GDP primarily comprises of the Consumer Spending, Export vs Import and Inventory. Looking at the above chart it’s easy to conclude that growth has been at best sluggish.

In all, the anemic recovery has done little to bolster the housing market but has been enough to pull it out of the troughs.

Housing Industry

“The housing market is coming back, gaining momentum, and it’s one of the bright spots for the economy as we start 2013,” said Robert Dye, chief economist at Comerica Inc. in Dallas.

PendingVsExistingHomes

Existing and New Home Sales on the Rise

Sales of U.S. homes probably rose in December to the highest level in three years. Combined purchases of new and existing properties climbed to a 5.49 million annual rate last month, the highest level since November 2009. Purchases of previously owned home climbed to a 5.1 million annual rate in December, the strongest since November 2009, economists project National Association of Realtors figures will show Tuesday. New-home sales picked up to a 385,000 annual rate for the month, the best showing since April 2010.

ExistingHomeSales

HousingStarts2

Builder Sentiment is Running High

Nonetheless, the economic improvements witnessed in 2012 – at least compared to the terrible years that preceded it – manifested themselves in ongoing good news for housing. The December increase in starts is consistent with the upward path of builder confidence over the last few months, as measured by the NAHB/Wells Fargo Housing Market Index (HMI). You can see below that there has been a surge in builder confidence specially since the later half of 2011.

BuilderSentiment

Construction Spending Gets a Boost

Per Census data, solid gains in both single-family and multifamily production resulted in nationwide housing starts rising 12.1% to a seasonally adjusted annual rate of 954,000 units: the highest level of new home production since June 2008. Single-family starts rose 8.1% to a seasonally adjusted annual rate of 616,000 units in December, while multifamily production jumped 23.1%, to 338,000 units. The improvement in home building in 2012 has boosted construction spending. Following graph corroborates this fact.

ConstructionSpending

Dwindling Inventory

As a result of the pickup in demand, the inventory of homes for sale has dwindled, driving up real-estate values and encouraging more construction. There were 2.03 million existing homes on the market in November, the fewest since December 2001, and 151,000 new houses for sale, close to the 142,000 reached in July that was the lowest since records began in 1963.

NewHomeInventory
Prices have Bottomed
The most recent S&P/Case-Shiller index of homes in 20 cities showed prices increased 4.3 percent in October from a year earlier, the biggest gain since May 2010. The gauge is up almost 9 percent since reaching a 10-year low in March. The median sales price rose 14.9% and average prices rose 20% that are likely a combined effect of higher priced homes sold and a reflection in the cost of building materials and lot price increases.
CaseShillerIndex
The Final Numbers – Actual Sales Vs Inventory
NewHomeData
 ExistingHomeData
What will Continue to Drive this Turnaround
All the economy pundits are betting that this resurgence will not fizzle out. Progress will probably build in 2013. Sales of existing homes will rise about 7.2 percent to 4.98 million this year, the highest since 2007, according to the median estimate of economists and housing analysts surveyed by Bloomberg. Prices will gain 3.3 percent after an estimated 4.5 percent jump in 2012, according to the forecasters.

“After seven years of navigating an unprecedented market downturn, we finally saw stabilization and recovery in 2012,” Stuart Miller, chief executive officer of Lennar Corp., the largest U.S. homebuilder by market value, said during a Jan. 15 earnings call. “While there have been and still are economic and political uncertainties ahead, we feel that this housing recovery is fundamentally based and driven by a long-term demographic need for housing. 2012, therefore, we believe is just the beginning of the recovery.”

But Why?
Extremely low mortgage rates, recovering house prices in most markets and pent up demand are few of the reasons that will provide forward movement in home building and home buying in 2013.
Sustained Low Interest Rates
InterestRates
Rising Rent
RentChart
Declining Foreclosures
ForeclosureStats2ForeclosureStats1
But there is a Weak-link: New Home Sales

Here’s TD Securities with some commentary:

The new homes market has been a laggard in the overall housing market recovery, and while new home building and existing home sales activity have risen significantly from their lows, new home sales have yet to enjoy a similar turnaround in fortune. In December, we expect sales activity to improve only modestly, with the pace of sales boasting a respectable 6.1% m/m gain to 400K. The increase in sales will add to the positive momentum in November, when sales rose an equally impressive 4.4% m/m, justifying the surge in optimism among home builders (as seen in the NAHB home builders’ sentiment report) about sales prospects in recent months. In the coming months, we expect the positive momentum in new home sales activity to be sustained, though it is likely to continue to lag the buoyancy in the existing homes market.

Here’s TD’s chart. Hopefully, the increasing home buyer traffic will eventually lead to a pick up in sales.

NewHomeSalesVsTraffic
Now How do we PROFIT from all this. Next in the series we look at Lennar and some other builders.
Disclaimer: All the above data have been collected from –

New Year, New Fervor!!

Phew! Now that I am almost  done with my MBA applications I am ready to get back to the investing. Honestly, even through the arduous process of writing and rewriting the essays, I did not pause investing. But before we delve into our mundane business let’s give a round of applause to the salvage act of politicians. Please accept our “Thanks” but “No Thanks”!!!

Thanks – because Obama could return to Hawaii in peace; and No Thanks – because after one month the same ordeal of “Sequestration and Deficit reduction” will start again, sending market into tailwind.

The outcome was a stellar opening to the new year.

I made following purchases in last three months –

FB at $25.5

LEN at $37.5

URI bought at $38 and sold at $47.5

WYNN at $117

ARUN at $19 and sold at $22.6

BAC at $10.3

HD at $62.3

EBAY at $51

WLK at $75.1 and at $78.9

NOV at $67.5

ASGN at $21.4

DG at $42.9 (this was initially bought at $49.1)

Lastly I bought doubled AAPL at $501.

I will delve deeper about all these transactions as soon as Stern and McCombs apps are out of the way. Following are the returns in my real portfolio which is in excess of $100K.

Perf

I also plan on writing about the best and worst trades of 2012. So keep watching.