Comments in Barrons about builders and book value that I found worthwhile.
With the market feeling better about interest rates, many investors jumped back into the builders, whose stocks could be expected to soar ahead of a potential Fed rate cut. The stocks certainly looked washed out before they attracted the renewed attention.
But the builder's rally is likely just an enjoyable summer zephyr.
Larry Jeddeloh, chief investment officer at money manager TIS Group, did buy shares of Toll Brothers (ticker: TOL) and Ryland Group (RYL), but he notes that it's a quick trade to take advantage of a likely short-term rally. "My gut feeling" is that there is another leg down for this group, he adds, as the stocks typically fall significantly below book value before they rally on a sustainable basis.
On that score, they aren't close. The accompanying chart shows that the S&P home builders are still trading, on average, at 119% of book value. Jeddeloh says he won't be convinced that the stocks have bottomed until they're at 80% of book. There will be another retest of the lows in the fall, he offers, as some of the institutions stuck with huge chunks of these stocks will want to exit, particularly in the tax-loss selling season. Anecdotally, a quick glance at recently filed 13F documents shows that funds are still weighed down with home-building shares.
Technical analysis also suggests that the worst isn't over. Says MKM Partners' chief market technician, Katie Townsend: "There's perhaps another 5%-to-8% rally left, based on the short-term oversold condition, but the group's long-term technical picture remains bearish."
About the best that can be said is that these stocks probably are closer to a bottom than a top. But when you're descending, the last step down can be as painful as the first. |
