A Little Old....
Cracks in the façade?
Goldman calls for gleaning profit in homebuilders
By Susan Lerner, CBS.MarketWatch.com
Last Update: 3:46 PM ET July 27, 2001
NEW YORK (CBS.MW) -- While stocks in many sectors have landed in the cellar of late, homebuilders have gone through the roof.
But Goldman Sachs believes that run may be losing steam and is suggesting some profit harvesting may be warranted given the sector's significant outperformance, rising unemployment and the absence of declining interest rates.
"It's been a great run, but trees don't grow to the sky," Goldman analyst Christopher Winham told clients, indicating that the builders are in the midst of one of the most impressive rallies in the last 15 years. The group has risen more than 125 percent in the past 18 months, he noted. "History suggests these stocks work best with a trading perspective."
In fact, Winham said, after the four most recent similar rises, the group fell an average 49 percent in the next six to 14 months. He further noted that in 10 of the 11 periods of significant price moves the performance of the homebuilders' stocks correlated with the trend in interest rates with the stocks rising as rates fell and vice versa.
"The direction of interest rates remains the single most important determinant of homebuilder stock performance, with 88 percent correlation to 10-year treasury yields," he said. "If the group outperforms without the backdrop of declining rates, it will be a first."
"Given the lesson of history and what we see as mounting macroeconomic concerns for housing, we think the builders will be hard pressed to extend their price gains (at best) and could potentially be poised for a meaningful pullback," Winham wrote in a research note. "For all but the longest term investors, we believe the risks in the group outweigh the rewards."
The Goldman analyst believes the record level of building activity over the last six years has likely filled the gap of underbuilding relative to demand, which had been credited with the surprising endurance of the housing market.
FRONT PAGE NEWS
U.S. shares struggle to find their footing
Ford shares sink after UBS hits the brakes
Goldman goes gaga over tech
AT&T in talks with Microsoft, Disney
Market news and more! Sign up to receive FREE email newsletters
Get the latest news
24 hours a day from our 100-person news team.
Add continued rises in unemployment to the pot and Winham sees trouble ahead for the sector, even though he believes valuations remain compelling.
"If the fundamentals are unlikely to get better here, then why should the valuations?" Winham asked.
With raw material costs for lumber, insulation, roofing, and wallboard all starting to rise again and ultimately exert pressure on margins, as well as other risks, Winham said he doesn't see many likely catalysts for multiple expansion.
And, if employment starts to pick up again with a recovering economy, worries about rising interest rates will also play a role in the sector's future, he said.
Winham rates Lennar (LEN: news, chart, profile) a "market outperformer" but the rest of the stocks in the group, consisting of KB Home (KBH: news, chart, profile), Toll Brothers (TOL: news, chart, profile), Centex Corp. (CTX: news, chart, profile), Pulte Corp., (PHM: news, chart, profile), and D.R. Horton (DHI: news, chart, profile), carry "market performer" ratings.
All the stocks, with the exception of D.R. Horton, fell Friday after the comments. |
