This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

More Trouble Ahead for Builders

Warren Buffett once said, "When an industry with a reputation for difficult economics meets a manager with a reputation for excellence, it is usually the industry that keeps its reputation intact."

That wisdom could prove particularly useful for investors eyeing homebuilder stocks.

The lesson is that the industry in which a business operates dictates much of the company's profit potential. And when competition is intense, profitability is destroyed.

That's exactly what is happening with homebuilder companies today. Supply exceeds demand, and the aggressive price-cutting of homes from big builders such as Lennar (LEN - Get Report) will eventually cause serious ripple effects among rivals.

Lately, builder stocks have rebounded on hopes that the worst is over for the companies. But one method of analysis provides a healthy dose of reality about the dire situation the homebuilding industry is still facing.

The "Five Forces Framework," a method developed by Harvard economist Michael Porter in the mid-1970s, is widely taught in MBA programs and used by corporate strategists.

It's also a powerful tool for investors to use when deciding whether to buy stocks in a certain sector, and it highlights issues that will continue to erode profitability for homebuilders.

Force One: Degree of Rivalry

Rivalry among companies is one of the most obvious forces in an industry. "It influences the extent to which the value created by an industry will be dissipated through direct competition," writes Harvard Business School Professor Pankaj Ghemawat in his book Strategy and the Business Landscape , which outlines Porter's framework.

1 of 4

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
BZH $17.48 0.00%
DHI $27.43 0.00%
LEN $50.43 0.00%
MTH $47.86 0.00%
RYL $48.18 0.00%


DOW 17,712.66 +34.43 0.19%
S&P 500 2,061.02 +4.87 0.24%
NASDAQ 4,891.2190 +27.8570 0.57%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs