Homebuilder Stocks a Sucker’s Bet

The stock market is a funny beast. At times, its trends make perfect sense. Other times, its moves leave you with nothing to do but shake and scratch your head.

Right now, homebuilder stocks are the big enigma.

The housing market, despite a dead cat bounce from a dismally low bottom, is still moribund. New home starts in January dropped by 8.5%, to an annual rate of just 890,000 units. This level of activity is about one-third as strong as the 2.3 million starts we saw at the market’s 2006 peak, and just half as strong as pre-bubble activity of 1.7 million units in 2000.

This is not the start of a vivacious trend for homebuilders. But they may not care – their stock prices are up between 49% and 137% over the last 12 months. Take a look at the epic rise of PulteGroup’s (PHM) stock price, which has led the pack…:

See larger image

This rapid appreciation of homebuilder stocks is so perplexing because stock prices reflect investors’ collective assessment of the company’s future earnings. This discounted cash flow model involves projecting how much a company is expected to earn (net income) next quarter or next year, then discounting that income stream to its present value.

The rub is, homebuilders haven’t made money in years. PulteGroup’s cumulative net income since 2007 is a negative $6 billion. KB Home (KBH) has lost money every single year since 2007, losing $2.3 billion in total – or 144% of its entire market cap!

So how investors are able to accurately project future profitability, which is absolutely necessary to determine a fair value stock price, is beyond me! I don’t think they are. I think the run up in homebuilders stocks is nothing but wishful thinking.

Investors are setting themselves up for a big disappointment when it becomes obvious that the property market will never, ever be what it used to be.

Stay tuned.

What Killed the Middle Class?

Today real incomes of the middle class are 5% lower than they were in 1970 and 12.4% lower than in 2000… when they peaked! How could this be?

In our new infographic What Killed the Middle Class?, we take a look at some shocking numbers to show how bad it’s become and what has been fueling this middle-class revolt.

 

LEARN MORE
Categories: Markets

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.