10/11/2006

Why are value investors loading up on home builders

I was going through the Blog Watch column by James Altucher, where he talks about ModernGraham's list of 15 favorite value stocks trading at low P/E ratios. Now here are the 15 stocks.
SPF, PHM, KBH, MDC, LUK, RYL, ASH, CFC, DHI, LEN, TOL, ORI, FNF, RS, CB

So why are they loading up on home builders, while bears are telling you to short them. Because they understand how market works and have confidence in their methodology. They believe based on future earning potential, these stocks at these price present compelling value.

I am not a value investor, but I have studied the methods of value investors in great detail and understand what they do and why they do it. I have great respect for their methodology and way of thinking. Also I understand from my study of mutual funds that vast sums of money is devoted to value strategy. Now that kind of understanding gives you a different perspective on the market.

Many years ago in one of the University talks Warren Buffet was asked what is his daily routine and he replied, something to the effect " I look at the 52 week low list in New York Times, pick up a Cherry Coke and start researching those companies further."

11 comments:

walter said...

the only bears saying to short the homebuilders are the ones that are already short and spend all day posting on the YAHOO! message boards - otherwise, i dont find any intelligent bears saying to short them... at least not among the things that i read...

walter said...

MON is example of your earnings growth model in reverse...

Pradeep Bonde said...

Yes. Disappointments are painful when they happen near 52 week high.

walter said...

not to start trouble, but regarding my earlier censored comment about who's saying to short HBs now, can you provide example?

thanks!

Pradeep Bonde said...

Doug Kass was pounding the table on them some few weeks ago. one of the most popular blogger was pounding the table on them till I challenged his assumptions and so he reluctantly said they may bounce here because there is so much negative being said about them. Implicit in it was, it is temporary bounce.

walter said...

one thing i have come to appreciate, especially as someone always searching for shorts, is that data and impressions of the economy are not directly correlated with the equity markets - there's a disconnect there... hence why i am a chartist - you can inspect chart w/o every reading any news or blogs

walter said...

the ability of this market to rally despite whatever news gets thrown at it, be it earnings, scandal, geopolitical, is truly amazing

Pradeep Bonde said...

Momentum often takes long time to reverse on long side.

Unknown said...

very interesting - not so much doom and gloom out there, according to this:

US economists still sanguine
Felix Salmon | Oct 11, 2006

The latest Bloomberg survey of economists has come out, showing that they expect both Q3 and Q4 GDP growth to come in at 2.5%, and 2006 inflation to be just 3%. The numbers are down a bit, hence the "slower US growth" headline, but very much in line with a very soft landing. In general, they seem to be pretty close to what the FOMC was thinking on September 20 – what Calculated Risk calls "a perfect soft landing". The housing market is at the forefront of everybody's mind, but there's still no sign of any recession panic.

http://www.rgemonitor.com/blog/economonitor

Chris Perruna said...

With Homebuilders cutting costs through various methods (such as layoffs), I would expect the charts to level out and trade sideways and turn higher later next year. I am not a value investor but some of these companies have a ton of cash. Insiders were selling in January 2006 - watch to see when they start buying again. I know as a former architect at one of these fortune 500 firms!

Pradeep Bonde said...

Chris
You are right. Frankly lot of what I read on home builders is irrational rant by bears.
Houses are not commodities, there is immense psychological value attached to houses in peoples mind. The housing buy or sale decision also is not one of simple economics.
It is predominantly about conspicuous consumption.Which neighbourhood you stay in, what kind of house you have and how it is furnished is all about making a statement to the world. As long as that basic human behaviour does not change, people will continue to buy new houses.

Plus housing decision at individual customer level are determined by their life cycle and not by overall macro economic factors. People get married, have families, get divorced and the housing buy or sale decision is more linked to it than what analyst are basin their assumptions on.