Too bad the charts don't copy and paste. Here's a very bearish piece from Cramer's rag.
On Dangerous Ground
By Dan Fitzpatrick
RealMoney.com Contributor
5/17/2006 11:01 AM EDT
thestreet.com
There are two sides to every story, and the homebuilding stocks are no exception.
Some are saying that the valuations are compelling and that all the bad news is already discounted into current prices. Others point to the continued bearish price action as evidence that the correction has further to go. A couple of weeks ago, I wrote that the pain was far from over in several homebuilding stocks. I'm going to weigh in on this again, because I just don't think Wall Street gets it yet.
The last time we saw a really bad real estate market was back in 1989-1990. Most investors don't remember what it was like back then, and I suspect that a lot of analysts are simply looking at their theoretical models and finding compelling valuations.
After my last piece, I heard from a money manager at Merrill Lynch who insisted that the homebuilders had tremendous value in their land holdings and said that I should stick to charts. He said that, just as Eddie Lampert has done with Sears (SHLD:NYSE - commentary - research - Cramer's Take), the homies will unlock all that intrinsic value and the stocks will start moving higher. He argued that the valuation of land holdings remains at the purchase price of that land, irrespective of changes in market value.
That may work well on corporate tax returns and balance sheets, but I don't think it speaks to the current problems facing the industry. If there are fewer people buying homes (and there are), and price sensitivity remains an issue (and it does), then absorption rates and net earnings per unit will suffer.
Perhaps all of this is already factored into current prices. But I hear about many homebuilders bailing out on big land deals -- just walking away from sizeable hard-money deposits because the acquisition just doesn't make sense any more. The purchase price is out of whack with today's market.
Also, I suspect that the projections for the remainder of 2006 are still too high. We are entering the time of year when the various divisions in companies start to fess up to corporate about what's really happening. Those are always tough meetings to have, and division presidents put them off as long as possible while they try to fix things themselves.
This line of thinking will drive the fundamentalists crazy, but I think it matters. I also think the price action matters. Let's look at a few weekly charts of homebuilders.
I've cleaned up today's charts by using a simple line graph rather than candlesticks. It's easier to see the twists and turns within Bollinger Bands. D.R. Horton (DHI:NYSE - commentary - research - Cramer's Take) recently fell below its October low on higher-than-average volume. This is a significant trend-line break, and I don't see any real support until around $20. Now, if it falls that far tomorrow, the valuation will make it a screaming buy.
Of course, that won't happen. But when estimates are again lowered in this sector in the months ahead, the homebuilders will deserve a lower multiple.
Like Horton, KB Home (KBH:NYSE - commentary - research - Cramer's Take) broke through key support last month. The next line of support is down at $55. A fall below that level would probably flush out a new round of sellers. I expect a retracement down to around $35 over the next year or two.
Toll Brothers (TOL:NYSE - commentary - research - Cramer's Take)has broken below $30 on heavy volume. RSI is rangebound beneath the midline. That's confirmation of the downtrend, and I wouldn't be confident in any turnaround unless RSI moved back above the midline. My bet is that this won't happen for a while.
There is a clear downtrend in Centex (CTX:NYSE - commentary - research - Cramer's Take). The longest price-by-volume bar is down at around $45. That's almost $8 below present levels. However, compare the trading volume at the various times during which Centex traded at $45. Most of the trading occurred back in late 2003 and early 2004. That's a long time ago, and I'm wondering whether this support level is even relevant any longer. I'd stay short this stock and ride it lower. But remember that it has fallen about 30% this year already. At some point, buying pressure will halt the downtrend, even if only for an oversold bounce.
Building Materials Holding Corp. (BMHC:Nasdaq - commentary - research - Cramer's Take) is cut from a different cloth. This company wears a lot of hats and does business with many of the large builders. The stock peaked in September and has been consolidating since. The decline has been fairly gradual. But make no mistake about it, the downtrend is intact.
These stocks are going to be great buys sometime in the future. But just as bull markets tend to last much longer than you'd think, the correction in these stocks could also last a while. Until I see some kind of sectorwide strength, I'm staying short these stocks.
As always, be careful out there. |
