2006 earnings are going to be exactly one year from now and therefore up 100% in one year is equal to 10 times next year earnings one year forward. SHORTS need to finally admit that BUILDERS are business that is structually sound and a lot different than in the past. They now have ROE of 20-25% compared to 10-15% in the past and their INVENTORY IS AT RECORD LOWS not what you'd expect with such RECORD PROSPERITY. (land is not growing on trees or in the dirt)
The average ROI is 10% causing in my opinion for the BUILDERS to be one of the cheapest sectors in the S&P 500 which currently has an ROI one-third of that. THEREFORE BUILDERS WILL COMMAND A HIGHER PE GOING FORWARD.
FAIR VALUE to get builders to trade at the same value as stocks in the S&P 500 you need to see share prices up 300% by 2006. I think at a minimum we get 100%.
Nice post. The only thing I would add is that the business in even more regionally divided than you implied. As you pointed out you can't move the product so arbitrage is not realistic for new home markets.
Significant opposition by environmental groups and local governments could be the real issue for the major HBs to address--building cycles can be extened indefinitely by this type of oppostion. ROI would be destroyed over time without costly reaction from the HBs.
<<< WOW, now i really know this bubble's gonna pop. >>>
You have much to learn, grasshopper. As I said, education can be costly. I have a feeling yours will be especially costly. Oh well, such is life.
To my prior post, just a couple of things I shouldn't have left out. After Japanese stocks finally said goodbye to PE ratios of 3 in the 1960's, they kept moving higher and higher - eventually peaking at PE ratios averaging nearly 100 in 1989. While I don't expect anything like that for the homebuilders, a PE of 15-20 is highly reasonable. This is not your father's homebuilder sector. These companies are larger, have better access to capital, can manage their assets much more astutely via computers, have better economies of scale than in the past. Nothing's change? Hardly. The top 10 homebuilders had only 10% of the new home market in 1990, today it's nearly 25%. Market share growth, build-to-order rather than on spec, EPS growth in both weak economic times and strong ones, EPS growth in both declining interest rates and rising rates. Those are the facts, ignore them at your peril.
Also should have noted - and these are just my projections, of course - the minor upleg that began last week should last 3.5 to 4.5 months, should take the sector roughly 40-60% above last Tuesday's lows. In the case of PHM, Tuesday (Feb 24) the low price was $45.79. So a 40% gain from there would take PHM to $64.11, a 60% gain to $73.26. And these prices should occur sometime in the mid-June to mid-July timeframe. That of course is just an upleg within the overall upleg that started in early 2000, and will take the sector up rougly 3,000% from the 2000 lows. So the 2010 peak price of PHM is likely to be in the neighborhood of $250-300/share. Just thought you'd like to know. Enjoy!
<<<We are still slightly less than halfway through the major upleg that began in early 2000 (and will likely last 10 years, peaking at least temporarily in 2010); >>>
WOW, now i really know this bubble's gonna pop.
<<< Actually, if the Europeans cut their rates (which they didn't) that would rally the dollar, (which was evident when the dollar rallied during speculation that the ECB would cut rates) causing the yield on the ten year to go higher thus making mortgage rates higher which is bad for the HB's. >>>
Why would a rally in the dollar (vs the euro) cause the yield on US bonds to go higher? Presumably, a European rate cut would mean that demand for new euro bonds would decline, thus supporting demand for US bonds, which would reduce interest rates. Or at the very least, an possible inclination for the US FED to raise rates in order to prop up a weak dollar would no longer be necessary.
As to your other comments, I'll have to put you in the camp that still "doesn't get it". Without going through my usual litany, I'll just point out that in the late 1950's and early 1960's, Japanese stocks traded at PE multiples averaging 3. And it became "a given" that they'd always trade at such low levels. When they FINALLY started to move up, a lot of self-styled "savvy" investors were no doubt saying "why should it be different now?". Sorry, but this sector is now stable enough to support PE multiples above single digits. You may think you are smarter than all the prior short sellers, by shorting at higher prices than they did, but when you cover you'll probably have lost just as much as they lost. We are still slightly less than halfway through the major upleg that began in early 2000 (and will likely last 10 years, peaking at least temporarily in 2010); we also are in a shorter-term upleg that began last week. But hey, everyone needs to learn their lesson; evidently this one just can't be taught. Education can be expensive, and hopefully when you've paid for yours you'll emerge with added wisdom, even though you'll have reduced your cash. Good luck to you, at that point in the future when you've learned your lesson and covered.
Some astute observations. I was one of the ones that got the internet shorting thing right. I was early but only by a week or so and just killed them when they blew up. And you are right, the touts were so euphoric before the blow up nothing mattered except "getting in."
There's really no difference here except the HBs really do make money. But where the longs are wrong is they have forgotten what got them here in the first place. Interest rates. If you look back before 1999 none of the HBs really did much then rates go to 50 year lows, the HB revenues go parabolic and the rest is history.
But now the longs have forgotten that and think this home building engine has a life of its own unrelated to interest rates, joblessness, debt or you name it. Now scared money is driving it i.e. fear of missing out.
Back in Dec 03, the HB's sold off over 15% in two days on the "fear" of an interest rate rise. Imagine, if you will, what will happen when fear becomes reality. Earnings in the HBs could look a lot more like 2002 or 2001 very quickly. Many of the longs on this board will go down with the ship just like good true believers should.
Nothing is different this time.
I'm waiting patiently.
<<<if the Europeans cut interest rates, could help propel our HB stocks higher (due to a reduced need to cut our own interest rates, in support of the US dollar). >>>
Actually, if the Europeans cut their rates (which they didn't) that would rally the dollar, (which was evident when the dollar rallied during speculation that the ECB would cut rates) causing the yield on the ten year to go higher thus making mortgage rates higher which is bad for the HB's.
the shorts on this thread have looked very stupid as of late. they've been wrong for nearly 3 years predicting doom and gloom for this industry. the longs on the other hand have been hansomely rewarded. but don't worry shorts, your day will come. i remember back from 1996 and on, pundits were already saying that tech stocks were overvalued, of course had you shorted techs back then, you lost your shirt, pants, and boxers and missed the biggest move in history.. the longs were talking about "new economy" "earnings didn't matter, all about growth" it's "different" now. sure they were right, but it didn't last forever, and when the bubble finally popped, those naysayers finally got to say "i told you so!"
with all the hype on the HB's these days, i believe the same can happen to them too. talk of HB's being "different" now, no longer cyclical, it's a "secular" change in the industry. but when this bubble gets pricked, these stocks will be just a fraction of what they are today, just like the once unstoppable techs.
Also regarding the Colorado new home market - this week SPF reported January & February orders in their Colorado communities were up 56% from the same period in the prior year. Now that may be a statistical anomaly, and may be too small a sample, or it might mean that the Colorado new home business is finally strengthening. Also, HOV on a recent conference call (not the most recent one) indicated that they felt Colorado could become a good new home market again. HOV actually has no presence in Colorado, but seemed to indicate they might go in there before too long, as they felt that the CO market would in fact start looking good again, soon. Perhaps it's already started getting better.
That's a good observation, shortsail. I've noticed a very high percentage of short sellers in the homebuilders, who have posted on these message boards over the years, live in Colorado. I'm not knocking Colorado or it's people, it's a great state with fine people, but in recent years it's been the worst state for new home construction, of the states where the big builders have land. Hence Coloradans have not been enthusiastic about the stocks of the big builders, even to the point where they've been vocal shorts (and had their hat handed to them with severe shorting losses).
People need to realize that in the homebuilding business, what they see going on locally does not necessarily reflect the conditions of all other areas. So often in the past few years I've seen stories knocking the homebuilder stocks, with justification via anecdotal evidence - such as some guy in Boston took 6 months to sell his existing home. Or the Detroit market is slow, so why buy the builders? The thing is, unlike nearly any other product, a home can't be moved from a low demand area to a high demand one. The big public builders can shift their resources to where the demand is, and away from where the demand isn't strong. Maybe that concept will finally sink in to a few more homebuilder short sellers. That is, those who are smart enough to admit when they've overlooked something, and can cut their losses. I realize that others will never admit they were mistaken in the first place, and will remain in their short positions with greater and greater losses all the way too the poorhouse. Good for you to have the brains to shift gears when you've processed some new information in your mind.
BTW, the J
Tomorrow's jobs numbers will be interesting; not so much the numbers themselves, but the reaction to them. Too strong (interest rate increase fears) or too weak (who will buy homes?) might hurt the HB stocks for a few minutes or even a few days. In the longer run, I believe the public will realize that things are fine with this sector, still undervalued even if rates go up or if it takes a bit longer for everyone to find a job. But what if the job numbers are "just right"? In that case, the rally may get even more short term fuel. One other possibility - if the Europeans cut interest rates, could help propel our HB stocks higher (due to a reduced need to cut our own interest rates, in support of the US dollar).