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Homebuilder Losers: Horton Hears a Boo

Stocks in this article: DHI TOL NVR LEN MHO

Most homebuilding stocks had hit a three-month trough at the beginning of November. Meritage Homes (MHO), for example, began the month at $17.68, jumped to $20.29 as a result of the "Toll Wind," and was trading at $18.05 in the afternoon session on Friday. Lennar (LEN) started off the month trading at $12.59, rode Toll to $15.12 on the 11th, before coming back to $13.58 on Friday afternoon.

Indeed, most analysts believe that overall conditions don't look very different from the beginning of the month. The bump given by Toll Brothers to the entire industry was probably overdone, and so any residual gains held onto by homebuilding shares even after the D.R. Horton-led tumble is in some respects, a positive. Given the fact that this week also featured grim reports on housing starts and mortgage delinquencies, without the Toll spike things could have been much worse.

"Many were too bullish to begin with," Stifel Nicolaus' Widner said.

Were the D.R. Horton earnings as bad as the massive sell-off suggests? The bad news was that the impairment-related impact to earnings was larger than many expected -- and the largest the homebuilder had taken all year -- and the company was still much more defensively positioned with its cash than some analysts had projected.

Indeed, given its relative balance sheet health, analysts had expected more use of cash to trigger a turnaround, but in the numbers and on the conference call with management today, the company clearly presented a picture of a continued defensive posture, according to analysts. "They made it clear that they don't plan on spending the cash to build ahead of the market," Widner said.

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