Why Investors
May Want
To Shun Builders
AHEAD OF THE TAPE
By JUSTIN LAHART
September 27, 2007; Page C1
Like moths to a flame, investors remain attracted to home-building
stocks -- and keep getting burned.
When the Federal Reserve cut its overnight target rate by more than
expected last week, home-building shares staged a rally, pushing the
Dow Jones Wilshire index of home-building stocks up 6%. That gain has
been erased. Yesterday, the index fell 3% to a low. It is down 53%
for the year and is 69% below the record it hit in July 2005.
Last week's rally wasn't the home builders' biggest day this year.
That came in early August, when the home-building index leapt 6.7%.
In fact, since home-building shares peaked a bit more than two years
ago, they have registered significantly more big one-day gains than
they did in the two years preceding the peak.
The possibility of nailing the bottom on a stock or sector is
enticing, because the rallies can be extreme. One month after the
tech-heavy Nasdaq Composite Index hit its nadir in October 2002, it
was more than 20% higher. When a group of companies is really
troubled, as the home builders are, their stocks to some extent
become "options" on their survival. If the companies make it through
the turmoil, the options pay off in the form of significantly higher
stock prices.
The only trick, then, is to find the bottom -- a difficult feat.
Today's August new-home sales report will give some sense of the hit
builders took from last month's credit-market turmoil. Considering
recent housing reports, it is hard to be hopeful.
Investors might be better off looking elsewhere. Satya Pradhuman,
director of research at Cirrus Research, points out that after
investing bubbles burst -- Japanese stocks in 1990, the Nasdaq in
2000 -- it can take years before investors return. Often, it isn't
until the old favorites aren't on anybody's radar screen that the fun
starts again. |
