Is the Homebuilder
Bloodbath Over?
By Ian Davis
August 25, 2008
Homebuilders sure are jumpy these days. Just look at the numbers...
Since the year began, the sector has rallied 57.4%, collapsed 40.8%, and is now working on its third major reversal, up 22.9% since July.
With moves of this magnitude, short-term momentum traders are making a mint. However, the volatility is a hair-raising experience for the rest of us... And it begs the question, where is this erratic sector headed now?
Well, despite some encouraging rallies lately, homebuilders are still in a bear market...
A huge "guillotine" formation has sliced over 70% off these companies' stock prices in the last few years. And a massacre of this magnitude takes time to sort itself out.
If you want a gruesome picture of the bloodbath, look at the following chart...
The Rise and Fall of Homebuilders:
Is the Guillotine Finally Over? |
|
I do think the guillotine stage of this sector's correction is over. As the chart shows, the sector is no longer plummeting through previous lows. The most recent low was only 6% lower than the one in January.
Thing is, what follows is often no better for investors.
You see, after any investment bubble bursts, chaos reigns and investors flee. This causes the guillotine formation we saw above. Next we have the sandpaper stage, where frustrated investors use every rally as an excuse to unload their losing positions. This causes the stock to grind lower over a long period.
Then – when all the investors who lost their shirts are out of the market – the sector becomes completely forgotten and left for dead. That will be the time for value investors to swoop in and make a killing.
The value may already be there, but the situation is still murky. For starters, most of these companies don't have any earnings right now. Therefore, we can't use price to earnings (P/E) as a guide. Instead, let's look at the sector's price-to-book value...
Homebuilders Are Dirt-Cheap Compared to Their Assets... But Asset Values Are Falling |
|
As you can see, in terms of book value, homebuilders are dirt-cheap.
Thing is, Datastream only updates book value on a fiscal year-end basis. Since all of the homebuilders in the index have fiscal year-ends between October and December, these book values are at least eight months old (most big builders are showing price-to-book values around one according to second-quarter reporting).
The median price of a new home is down 5.6% since 2007's fiscal year-end, so you can bet that homebuilders' book values will be revised lower in December.
So... at less than 0.9 times trailing book value, homebuilders seem cheap... But I think it's smart to hold off on buying these stocks right now. The book values could fall farther. There could be a little more bleeding.
I've got an eye on the homebuilders... we'll learn more about the sector's book value soon. We'll know whether they're a slam-dunk "buy" in five months.
Good investing,
Ian Davis
