Lennar Hammers Away at Housing Hopes

Using this projection, Lennar is currently trading at nearly 20 times next year's earnings. The shares recently were up 28 cents to $47.16.

Assuming next year is the earnings trough, Lennar's stock might look reasonable. The problem, however, is that management has given no indication that fundamentals will get better soon.

If 2008 is going to be even worse than next year, then 20 times earnings doesn't look so cheap. As well, Lennar is currently trading 30% above book value. (Many have argued that the stocks were cheap when they were at book value.)

Builder shares have rallied since mid-July, with many investors largely ignoring bad news and believing the stocks may offer compelling value. Lennar is up 21% since then.

One hedge fund manager who invests in the space says the rally was largely due to the falling yield on the 10-year note, which has gone from above 5.2% in July to 4.59% Tuesday.

The manager's gut feeling is that large hedge funds and mutual funds who were underweight the builders saw the dropping 10-year yield and decided to punish the shorts, especially over recent weeks when the Treasuries rallied.

But if the 10-year yield gets back above 4.75%, builder stocks could correct downward again, the manager says.

Most builder stocks Tuesday were adding to recent gains. Centex (CTX) was up 3.2% to $55.29, Hovnanian (HOV) jumped 4% to $31.41 and Ryland (RYL) advanced 2.5% to $46.34.

To view Robert Martorana's video take on Lennar's results, click here.

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