Seppo,
I have become very rigorous in my approach to stocks: I try to rule out the noise. That means company press releases and appearances on CNBC (except as absolute contrarian indicators that the top is in and the fix is on), as well as conference calls.
In cyclical stocks we have to understand P/Es backwards (as we have noted before in this space; sorry if I'm repeating what everybody knows). When cyclicals turn and their fortunes improve, their earnings rise. That is what is happening (has happened) now with the homeboys. They have fat earnings. Their stock prices follow at a slight lag, which means their p/e ratios are compressed (higher e, not as much higher p).
So, the slow investor says, if TOL was a good buy at a p/e of 10, it must be a great buy at a p/e of 8.
But what happens when the cycle turns, high end housing pricing power falls (okay, collapses), existing high end houses sit on the market for months & years and $600K houses suddenly become $450K houses?
Simple, earnings get revised (oops) and then cut. Let's say, just for discussion's sake, TOL decides to bite the bullet and take earnings of only $3 in 2003, its p/e might rise to 11 and still the stock would price at $33, a 25% haircut from today. But investors look at earnings trends and, with interest rates on the rise and the rest of the economy recovering, maybe the market thinks $2.25 is what TOL will earn in 2004. Even at a higher p/e of 12, the stock now prices at $27.
So, to make a long story at least come to its own conclusion, when p/e's are low in cyclicals it's time to sell, when they're high, it's most likely time to buy. We all saw this in the land drillers a few years ago. [E]arnings collapsed to near zero or below with prices in pursuit. You could pick up PTEN and UTI and GW for a few dollars but you had to buy them with either no p/e or sky high p/e.
Now as for determining when TOL and its brethren have reached "high," that's where we all have to take / not take a position sooner or later and wait and see. For right now the charts are being kind of coy with us, and the inadvertent market-making activities of the shorts are delaying le moment de resistance, but it will come, imho.
Kb |
