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19. BZH back on the bankruptcy list and chimpcontest update



May 04, 2011 – Comments (13) | RELATED TICKERS: BZH

Homebuilder Macro's 

Staying consistent, the economy and the stock market cannot stay afloat without a recovery in homebuilding.  Homebuilding will pull both back down vs. the economy pulling homebuilding up.

2nd quarter and 3rd quarter YOY numbers will be negative.  You won't see positive numbers until 4th quarter.

There is little money to be made in production housing.  I didn't make any money building production homes the last year.  I made all my money building infill homes that sell for over $400,000.  Homebuilders with the highest average selling prices will generate greater earnings sooner.  This is a result of people with money being able to obtain mortgages and the lack of foreclosure deals in higher end / infill markets to compete against new housing. 

TOL $586,000 average selling price

SPF $327,000 ASP

NVR $315,000 ASP

MDC $292,000 ASP

Builder stocks have performed poorly vs. the SPY.  However, the best ones will not retreat more than the SPY stocks when the SPY retreats.

Some very wealthy individuals (billion dollar plus) are putting funds into residential real estate.  Either land or apartments.  The two that I know have put money into these type of funds have been invested in commodities (agriculture, metals and oil) for the last 6 years.  Why am I bring this up?  Their people who vet out funds / assets to invest in state that the core belief is significant inflation and to invest in hard assets.  Residential real estate is one of the few assets left that is significantly depressed.  Yes, other hard assets have upside but they are not as depressed in value.

The Royal Wedding was better than I imagined.  It would be nice if we had a monarchy here in the states.  Then we could start building castles and get homebuilding rolling.  I came up with this idea all by myself.   


BZH - Beazer Homes - one year bankruptcy alert

On Feb 10, 2010 I did a write up on Sleazer homes.  I didn't think it was possible for any builder to totally F up their business since the March 2009 equity bottom but I stand corrected.  Beazer traded between 25c and $1 all day long in March 2009 so that would make it a 4 to 16 bagger if you sold yesterday.  Beazer's 52 week high is would have brought you a 20 bagger from those March 2009 lows. 

However, the number of 10 bagger opportunities from March 2009 were endless and many of them safer investments from a balance sheet perspective.

I am officially putting Beazer on a one year bankruptcy alert.  What does this mean?  It means that at their current pace in one year they will not be able to reverse course and will go bankrupt in 2012.  Significant changes need to be made to save them fools.  The problem is the macro environment will be flat/sideways for the next year, so you cannot rely on a rising tide to lift all ships. 

How did Beazer stumble?  Macro economics?  No, if that were the case then all public builders would be punting the ball right now.  Beazer stumbled the old fashioned way.  Lousy management. 

Ian McCarthy, CEO.  Is this the only guy the SEC nabbed during the great fraud that took place with our housing market, mortgage securitization and banking system during the financial crisis?  Think about it.  This guy actually got caught, had his bonus' clawed back and still holds title as CEO. 

Every other banker, investment banker, mortgage company CFO, homebuilder CEO committed some type of fraud or lied through their teeth, yet this guy actually gets caught and has to give back compensation!!!

Anybody who is prosecuted and loses to the SEC is just too stupid to be running a public company.  Seriously......  Actually getting caught by the SEC?  I didn't think it was possible.


Things to worry about if you are so inclined to do so

So lets go down memory lane and reflect and rehash some of my arguments that I made on BZH three months ago.

1) Gross Margins and SG&A.  Gross margins are 19% before cost of sales interest expense and write downs.  This is actually up from last quarter's 17%.  All those massive write downs from last quarter are paying off so quickly!  The key to improving gross margins is to write down your inventory value.  This is why accountants are so smart.  We know how to create future earnings growth.  SG&A is still at a nose bleeding 32.9%.  Every time I look at Beazer's SG&A I think I am running the numbers wrong.  Oh that's right, Beazer never tells you the SG&A numbers in their business wires like other homebuilders.  They make you calculate it out.  I wonder why?  The industry median is 19.2% and in normalized times you would expect to be around 12%.  I haven't done much digging to find out what is buried in Beazer's consistently high SG&A.  However, if your neighbor is burying things at 2 am in his backyard wearing a clown suit and clown makeup you can assume that whatever you dig up the following night is probably not something good.  There is nothing good in Beazer's SG&A numbers.

Go to their website and look at how many locations they are in and in many of those locations they have 1-3 sites.  A total waste of overhead with no operational efficiency.  Compare that to the other homebuilders.  You need a minimum of 7 sites do really start gaining operational efficiency in a market.

2) Losses.  I did not bring this up three months ago, but now that Beazer has 6 months behind them for 2011 (they are not on a calendar year) lets take a look at their losses.  They have lost $103 million on $237 million in revenue.  WTF?  Seriously, there is no builder even close to these horrific numbers.  These are the type of numbers you expect from a biotech company trying to discover the cure for irritable bowel syndrome. 

OMG.  They are basically building homes at house and land cost and this is with four years and a quarter of writing down land assets!!!!!!!!!!  They are losing almost 50 cents on every dollar they make.  Is this possible?  I would actually be relieved to find out that these losses were a result of Ian McCarthy funneling money into an offshore bank account.

"oh whew, you actually didn't lose all this money building homes..... you were stealing it, what a relief"

3) Land holdings.  Previously I mentioned Beazer's land holdings sucked.  For those of you who read with a lisp that means the land holdings are very bad.  Normally when a company is performing poorly they leave out critical information so it is difficult to see how awful they are.  Yet Beazer actually provided me information that isn't very common, a breakdown of their inventory into different buckets.  Again, management is so stupid they can't even shield their stupidity.

So how about some math my friends 

Beazer has $295 million in equity (A $100 million drop from 6 months ago)

Beazer has approximately 74 million shares outstanding (A 17 million increase from 6 months ago - dilution anyone?)

That appears to be a book value of $3.98 a share.  Appears as in a hallucination

"No really man...........  I see book value, it's right over there next to the dragon"

Beazer's cash is $453 million (A $123 million drop from 6 months ago)

In the last 6 months Beazer has spent $123 million in land and land development (at least we know where the cash went). 

However, now Beazer controls 8.7 years of land!  I would suggest that when you are losing tons of money you shouldn't burn cash to substantially increase your money tied up in land.  The only builders who should be loading up on cheap land are the ones that are cash heavy.

Beazer has $377 million in land for future development.  I am going to bet big that barely any of that has been written down based on my intel with other builders.  I am also going to bet that if Beazer were developing anything in the last 2 years it was land that had value.  In other words, land that was developed so that you can make a 20% gross margin or better.  Thus, this land was not worth developing and probably wasn't written down at all.  I would put it at 20 cents on the dollar because that is the going rate for poorly located raw land not worth developing based on large pacakge deals sent to market today. 

$377 million x 80% write down in value of land to market = $301 million of imaginary book value.

Beazer's book value is ZERO.  I would put the value of all their other inventory assets at 90 cents on the dollar based on going rates and prior write downs.

Beazer has $453 million in cash, $1.3 billion in debt and cannot convert their inventory at a ratio that would leave book value intact. 

Beazer will require another massive dilution if homebuilding doesn't do a V shape recovery which it isn't going to do.  I can't see Beazer raising more debt unless it is super junky.

We are going to monitor Beazer's health every quarter for the next year.  I cannot see how it gets better based on what I am seeing in the market.

4) Debt Interest - As I mentioned three months ago, Beazer has high interest debt.  In virtually every tranche of debt based on maturity Beazer is the worst.

2018 BZH $300m at 9.1%, LEN $295m at 6.95%

2017 BZH $250m at 12%, MTH and PHM $150m approx at 7.6%

2016 BZH $173m at 8.1%, DHI 600m at 6.1%

You cannot spot your competitors with these type of spreads on $1.3 billion in debt.  They will eat your lunch.

Beazer is a 10 bagger from here if they survive.  However, they are tanking like Chef Boyardee working a Carrabba's kitchen.  The secret sauce just doesn't taste right

I am going on record stating that Beazer goes below $3 easily this summer and establishes a 52 week low. 


Chimpcontest - The bottom

Is it just me or do two stocks in the contest actually show zero as their current price?  Oh I see they are Chinese stocks.  And you think our markets are rigged!!!

In fact almost all the bottom 10-12 stocks are Chinese stocks.  I thought their economy was still going gangbusters?  How can stocks trading at cash value or a p/e of 2 be bad investments?  I remember when my Olde broker back in the late 80s would recommend a $hit stock to me.  After losing half its value in 60 days I would call him and say "dude, what is going on I'm losing my a$$".  He would reply that "the stock is actually a better value and I should average down on my investment".

You know what I really enjoy?  Reading the yahoo message boards of stocks like these 6 months prior to their collapse.

Chinese Proverbs to remember when investing

Man who buys extreme value has hideous wife that can't cook

Man with large china stock losses has many carry forward deductions

Man who walk through narrow door sideways going to Bangkok

Man who convices many men on message board to buy Chinese stock gets back to even


Seriously, stop buying Chinese stocks and recommending them to others.  Please

Chimpcontest - The leaderboard

Do you want to know what the top 3 stocks on our leaderboard have in common - CIGX, VICL and EXAS?  They all have negative earnings estimates for 2012.

So if you want to lose money buy a Chinese stock trading at cash or a 2 p/e.  If you want to make money buy an American stock that loses money.

Common sense my friend.  This is how you make money in the stock market

The top 3 stocks on our leaderboard are the same as a month ago.  Making this quite a boring contest.  Additionally, as a group we once again are significantly underperforming the SPY.  Thank God you provided me your best stock picks and not your worst stock picks.  Can you get any worse than two stocks being halted/delisted?

We still have a number of months before the chimpcontest ends.  I have to believe when all is said and done a real American stock with real American earnings will win the contest. 

13 Comments – Post Your Own

#1) On May 04, 2011 at 6:35 AM, nilesgold (21.97) wrote:

Your posts are always a good read.  Any change in your opinion of the best homebuilder stocks based on long term appreciation from current market valuation?  If I recall correctly you've been long term bullish on LEN in particular.  As for the smaller plays you've mentioned MHO and MTH.

I think it's safe to assume that the chimpcontest picks are suffering due to the fact that people will usually put an emphasis on extreme upside potential, regardless of risk or the likelihood of share price decline.

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#2) On May 04, 2011 at 9:23 AM, zzlangerhans (99.57) wrote:

Don't forget that the top 4 are all small-cap biotechs (and 6 of the top 10). Guess biotech beats China in 2011.

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#3) On May 04, 2011 at 9:58 AM, chimpcontest (< 20) wrote:


ASP and absorptions will be a driving force in 2011 as it relates to valuations and how a builder stock should trade.  So the 4 stocks I mentioned above have the least downside with upside potential.  From a long term view your worst builders have the most upside and that usually is the case with most industries.  However, reducing risk and buying a good builder one would still get plenty of upside.  I like MDC, TOL, MHO and MTH in that order. 

My opinion changes from quarter to quarter as to who the top 2-3 are, but over time I tend to rotate the same builders.  I base it upon the execution of strategy and results that go beyond the actual earnings.



You could be the TMFSinchiura of metals or the Alstry of doom right here on CAPS with your knowledge of the industry.  At least your industry produces a lot of volatility for traders, never boring.

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#4) On May 04, 2011 at 10:34 AM, kdakota630 (28.86) wrote:

What?  No funny Charlie Sheen video this time?

Fine, I'll provide one:

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#5) On May 04, 2011 at 12:33 PM, MegaEurope (< 20) wrote:

I understand you hate Sleazer but surely they're still #2 on the bankruptcy list after Hovnanian?

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#6) On May 04, 2011 at 11:17 PM, MLGtrader (31.87) wrote:

Great blog post as always!  Do you think that another builder would buy them up as they are on their way to bankruptcy?  They have $308 to $430 in deferred tax assets, which could be valuable to a builder that will become profitable in the next 20 years.

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#7) On May 05, 2011 at 1:09 AM, Nickalisk (70.71) wrote:

Don't forget that the top 4 are all small-cap biotechs (and 6 of the top 10). Guess biotech beats China in 2011.


I'm starting to see why you and portefeuille love biotechnology so much.

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#8) On May 24, 2011 at 7:42 PM, Option1307 (30.68) wrote:

Great stuff per usual Chimp, thanks!

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#9) On June 13, 2011 at 6:56 PM, Donqi (32.28) wrote:

Chimp -

what do you think about BZH's CEO getting the axe today????  great blog as usual.

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#10) On July 16, 2011 at 2:16 PM, chicagobuilder (< 20) wrote:

Hey Chimp,

I am a homebuilder in the Chicago market and I have been following your blog for a couple of years. I was hoping to get in touch with you via email to pick your brain about a couple of things. I might also have an opportunity for you as well. Since I cant find an email address for you here, my email address is

 Drop me a line when you have a minute. 


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#11) On August 08, 2011 at 7:38 PM, kurtkalamar (< 20) wrote:

Looking forward to BZH earnings tomorrow.  Should be a goodie.

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#12) On August 09, 2011 at 1:50 PM, TDRH (96.52) wrote:

We need an update on the status of the homebuilders.   Not here to rub salt in wounds, but it is a year after your called bottom last August.    What do you see?

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#13) On August 10, 2011 at 7:53 PM, WallstreetKnight (40.63) wrote:

I'm also curious about the Homebuilders - also, when does this contest end?

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