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What do you do when the facts simply refuse to fit the downbeat story? One thing we know about the economy after the fall is that housing has either slowed or stalled out entirely, a victim of higher interest rates, affordability and a sense that mortgage money remains hard to come by. Plus, we've been hearing endless horror stories about one-fifth of the country that was robust, the one-fifth of the country that is California.
Then along comes KB Home (KBH), a builder that is synonymous with California, and it delivers a beat-the-band top line, bottom line, every line and number that calls into question the entire negative housing thesis. It's just inexplicable, and as much as the theorists want to throw this number to the wolves of distortion and hubris, there's nothing you can do about a stock that won't fit with the negative story.
Now, there is a component of KB Home that is intrinsic to the company, which his genuine margin expansion. We are so used to homebuilders making less and less on homes because of the high price of land and the raw costs of what goes into a home and who labors over them, that we had a kind of built-in disappointment factor.
Yet, again, KB Home puts the lie to that negative twist in part because pretty much everything that goes into a home has come down in price. Think about the collapse of copper, and the waning of lumber and sheet rock. The land was bought cheaply, as well, and in great places, and labor-price escalation is a thing of the past.