Just a few days ago I wrote an article suggesting that a trading bottom could be near in the stocks of homebuilders. Somehow, I forgot to point to the action in the stock of Toll Brothers (TOL). It also had a nice bounce in price on high volume in a weak stock market last Friday. But on Monday, the market took it all back, and on Tuesday the awful truth came out: TOL's business still stinks. This news likely caused much of the sharp declines in housing stocks across the sector on Tuesday.
I have written about TOL before. Last November, I "applauded" TOL for admitting that it was seeing a slowdown in business. Since then, the majority of TOL's competitors have reported good earnings numbers and have predicted more of the same for 2006 and even 2007. One big difference is that TOL focuses on the luxury market. This segment of the housing market is typically first to get hit by a slowdown in real estate because these high-priced products are essentially discretionary. When folks start to feel poorer, they will either postpone the purchase of that dream mansion, or they will get real and buy down to a more affordable home (or if they are lucky, they can get a seller to bring prices back down to earth). I have also read several analysts defend the homebuilders by stating that a slowdown in housing may not hurt results of the bigger players as they continue to take share from the smaller players. Regardless, I believe that TOL is "the canary in the coalmine," and we have all the proof we need that the housing boom has ended...at least for now.
So, what about Friday's tease? Is there or is there not a bottom looming in homebuilding stocks? Well, take a look at the fundamentals and the charts for yourself. When I looked at Meritage (MTH), I noted the important line of support that was getting tested. (For you technicians, I should emphasize that the daily pattern I pointed to was a bullish engulfing candlestick pattern. I printed "not" instead of "note" on the chart. Also, take a good look and you will see a dangerous head & shoulders top forming!). I also noted a big run in the stock over the past six years. If MTH is making a bottom, it is a shallow bottom compared to the long-term chart. All it would take is for MTH to declare a big miss in earnings forecasts for the market to send the stock cratering by 20% more. Such an event would justify the extremely low P/E ratio of the stock. But if MTH can continue to muddle along, eventually all the negativity surrounding it must burn off and dissipate. The same logic applies to most of the stocks of the homebuilders. However, TOL's problems tell me that MTH's troubles are not over, and the stakes have now been raised in this bottom-calling game.
Let's take a look at the key issues that TOL mentions in Tuesday's earnings warning. I see both trouble brewing and hooks for clining to hope. I encourage you to read the press release in its entirety for yourself especially for the specifics on the financials. Some of my notes come from listening to the actual conference call and the question and asnwer period with analysts (it was a loooooong call, and I can tell from the articles in other media outlets that no one endured the entire thing...if they bothered listening at all).
TOL reports earnings on February 23, 2006. Even with this prior warning, we should expect more drama...and perhaps closer resolution on the question on whether homebuilder stocks are building bottoms or building false hopes.
Be careful out there!
The commercial mortgage loan is provided for big entrepreneurs in order to maintain businesses set up on a large scale. The mortgage lenders play a central role in convincing the customers to buy mortgages for getting financial assistance in case of foreclosures. There are extensive catalogues of different kinds of loan companies which offer free home mortgage leads. The bank home loan is offered for homeowners in order to cater to the needs of home building. The home owners are provided the opportunity to refinance to get the best remortgage rates by pledging on the same property.