Bearish Outlook for Home Builder Stocks

So on Mad Money last week Jim Cramer, the self-appointed genius stock picker, lost out to Yours Truly when it comes to shorting the home builders. Earnings are coming out this week on a number of home builders and I’ll be proven right again.

Originally I wrote an article on 2/22/07 on my ActiveRain blog entitle, “KB Homes Hemorrhaging Money…$50 Million in the Last Quarter!”, proclaiming the writing was on the wall for KB Home after losing $50 Million in one quarter. I was also concerned about other home builders like Toll Brothers, Beazer, Lennar, and DR Horton who had all seen a tremendous spike in cancelled contracts the previous fall.

But I beat Cramer to the punch since my recommendations to short these guys came a year ago when the Wall Street crowd said the “worst was over”. Below you’ll see a snap shot of my Short Portfolio with dates, today’s current price in bold, my original short price, the date of the short price, and the annual return.

This post and therefore the current stock prices you see are as of 7-25-2007…by the time your read this…they will be worse!

Click on the thumbnail images below to see larger photo…click enlarged photo to return.

Short Portfolios

Lennar

You’ll notice some of the home builder stocks have yet to really tank, but remember I shorted them last August after most of them had already fallen 40-50% and everyone said the tumble was over. Almost all of these stocks as soon as I shorted them started climbing and climbing. Some of them climbed so high, they were trading at the pre-bust levels. But I stuck to my guns, and didn’t let the talk of Wall Street analyst sway me from what I knew was a systemic cancer one good quarter couldn’t heal.

(There is a lesson in there for those of you thinking about shorting stocks. Shorting takes guts and conviction. This portfolio stayed underwater for months. Go look at the charts, it was ugly, but when it turned, it turned in a big way.)

So, yes, even I was late to the party…but the party wasn’t over then…and it certainly isn’t over now. When a beat up sector can still produce 20%-60% annual rates of return to the down-side, you know you’re on to something. I’m going to ride these dogs all the way to zero. I already did that with New Century the subprime lender that went under a few months ago.

All of these home builder companies and their home mortgage subsidiaries still have a long way to fall. Will you rake a little cash off the table?

Good Luck

PS: For those of you very astute, you may have noticed one of the photos shows another “giant” falling fast…Countrywide Home Loans. While everyone was shorting subprime lenders (including me), I also decided a prime lender like Countrywide was also ready to pop. The leak is there now with their subprime blow-back just coming home to roost…and yes, it will get worse.

PPS: This is not a recommendation of an investment or investment advice. Please seek professional assistance before making investment decisions…blah, blah, blah.

Author: Rob K. Blake
Published July 25, 2007

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