With Beazer Homes forward P/E at 39.8 times, why own this homebuilder?
D.R. Homes' fair value is down, and since it's near the annual risky level, it may be time to let go.
Despite Toll Brothers being up for the year, investors should remove holdings on strength.
The rally in the homebuilders is unprecedented, given the weak earnings and warnings from many CEOs. Valuations are through the roof, but investors don't seem to care. I don't believe that I have ever seen a group of stocks this overvalued according to my model. Valuations are so stretched, the forward P/E ratio for Beazer Homes (BZH - commentary - Cramer's Take) at 51.7 times makes Google (GOOG - commentary - Cramer's Take), at 32.9 times, look like a value stock.
For the homebuilders, technicals have led fundamentals since July, but now several names have reached my pivots and risky levels, which are the prices at which investors should reduce or exit positions.
The National Association of Homebuilders' Housing Market Index is trying to bottom between 30 and 35, but remember that any reading under 50 indicates that the market for new homes is poor. It is also true that new-home sales rose 4.8% heading into 2007 to a seasonally adjusted annual rate of 1.12 million units in December.
For the year, sales were down 17.3%, the sharpest decline since 1990, and on a par with sales of 2003, as the housing bubble began to inflate. Lower interest rates, lower energy costs and warm weather in the Midwest and Northeast helped the year-end rebound, however. Sales were actually flat in the South and down 4.4% in the West.
The FOMC says: "Recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market. Overall, the economy seems likely to expand at a moderate pace over coming quarters." Anyone with logical thinking knows that housing does not turn on a dime between FOMC meetings.
Look at the PHLX Residential Housing Sector Index. Note that this index is testing the downtrend that connects the highs of July 2005 (293.66), January 2006 (280.70) and April 2006 (275.52). After viewing this chart, check your portfolio and remove the homebuilders. In my judgment, the housing market will take years to bottom, not quarters.
Philadelphia Housing Sector Index The index is currently testing its 2005-2006 downtrend
Overvalued Homebuilders Valuations are through the roof, but investors don't care
Company Name
2-Feb
Close
Rating
(-UV) /
OV By
Fair Value
MOM
5-Wk
MMA
Forward
P/E
Value Levels
Pivots
Risky Levels
Beazer Homes (BZH)
$44.48
SELL
93.30%
$23.02
DM
$44.69
51.7
36.90 M
53.85 A / 60.82 A
Centex (CTX)
$55.10
SELL
184.40%
$19.37
DM
$53.76
39.8
48.06 M
57.30 M / 57.86 A
60.74 Q / 61.25 A
DR Horton (DHI)
$30.86
HOLD
73.90%
$17.74
OB
$27.38
16.6
23.82 M
30.47 Q / 28.78 A
32.07 A / 36.12 S
KB Homes (KBH)
$55.64
HOLD
81.30%
$30.69
RM
$51.18
13.3
44.64 M
54.84 A
60.42 A / 67.70 Q
Lennar (LEN)
$56.11
SELL
107.70%
$27.01
RM
$52.13
23.5
49.95 M
53.64 Q / 55.45 A
63.40 A / 63.75 Q
Pulte Homes (PHM)
$35.10
SELL
107.40%
$16.92
RM
$33.08
23.1
30.94 M
33.50 A
37.65 A / 40.70 Q
Toll Brothers (TOL)
$35.35
HOLD
155.90%
$13.81
RM
$32.34
22.6
29.46 A
36.41 A / 37.30 Q
39.31 S
Key: MOM, momentum; OB, overbought; DM, declining momentum; RM, rising momentum; OS, oversold; F, flat; M, monthly; Q, quarterly; S, semiannual; A, annual. A value level is a price at which my models project that buyers will emerge; a risky level is a price at which investors are likely to reduce holdings, according to my models. A pivot is a value or risky level that has been breached in its particular time horizon; the stock will likely trade around this pivot.
Source: RightSide.com
Beazer Homes: The stock has declined so far this year, and fair value has dropped to $23.02 from $27.21. With a forward P/E ratio of 51.7 times, why take the risk of owning this homebuilder?
Centex (CTX - commentary - Cramer's Take): It is down on the year but bottomed at $50.56 on Jan. 29. Its fair value is down to $19.37 from $43.93 at the end of 2006. With a forward P/E of 39.8 times, this homebuilder is no bargain. Investors should consider removing this one with the stock against monthly and annual pivots of $57.30 and $57.86.
D.R. Horton (DHI - commentary - Cramer's Take): It is up from $26.49 so far this year, but fair value is $17.74, down from $19.03. With DHI between my quarterly pivot at $30.47 and annual risky level at $32.07, investors should consider removing this homebuilder from their portfolios.
KB Homes (KBH - commentary - Cramer's Take): KBH is up from $51.28 so far this year, and strength has reached my annual pivot at $54.84. This is the first level at which investors should consider paring back positions on this homebuilder.
Lennar (LEN - commentary - Cramer's Take): Lennar is up from $52.46 so far this year, while fair value is down to $27.01 from $35.52. This homebuilder has rebounded above my annual pivot at $55.45, which is the first level at which investors should consider paring back positions.
Pulte Homes (PHM - commentary - Cramer's Take): Pulte Homes is up from $33.12 so far this year with fair value at $16.92, down from $25.89. Investors should consider removing this homebuilder from portfolios at prices between my annual pivot at $33.50 and annual risky level at $37.65.
Toll Brothers (TOL - commentary - Cramer's Take): Toll is up from $32.23 so far this year, and investors should consider reducing this homebuilder on strength to my annual and quarterly pivots at $36.41 and $37.30.
P.S. Will you be there when Cramer makes his next move?
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homebuilders No Bargains in Homebuilders 12/5/2006 7:24 AM EST Plus, regional banks are also looking vulnerable here.
At time of publication, Suttmeier had no positions in any of the stocks mentioned in this column, although holdings may change at any time.
Richard Suttmeier is the chief market strategist for RightSide.com, where he writes the Small Stocks and Sector Report. Early in his career, he became the first long bond trader for Bache and later began the government bond department at LF Rothschild. Suttmeier went on to form Global Market Consultants as an independent third-party research provider, producing reports covering the U.S. capital markets. He has also been the U.S. Treasury strategist for Smith Barney and chief financial strategist for William R. Hough. Suttmeier holds a bachelor's degree from the Georgia Institute of Technology and a master's degree from Polytechnic University. He appreciates your feedback; click here to email him.
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