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HistoricalPEGuy (68.05)

Totally missed it...



February 02, 2007 – Comments (5)

So I decided to look into the housing stocks, figuring they've gotten beat up pretty good, only to find a nice rebound. Did I miss the bottom? You bet I did.

Housing stocks w/ low PE are a great sector to use the Historical Low PE metric. These guys got hammered (and for good reason) over the past year. But where's the bottom? This is where the historical PE ratio can really help you.

Take TOL - The lowest PE it has seen in the past 10 years is PE = 5.5 just aftet Sept 11th, 2001 and PE = 5.7 in February 2000. It reached a PE = 4.4 in July 2006. What a perfect time to buy. The market over-reacts and this is one way (not the only way or the only metric) to see if its time to buy. Other homebuilders show the same results and I missed it. Trading at $25 in July, now at $32 it seems like a big miss - I don't think it'll ever be that low again. I'm not a big buying fan right now as I don't believe the growth prospects (something you need to believe if you buy a stock with a relatively higher historical PE).

You can't win them all. I picked up MLM in a similar situation this summer and its been great since. The market learns its mistakes - looking at the historical PE is a nice metric to determine how cheap it really is. Price is irrelevant. The sector is irrelevant - only how they perform relative to their history. I must repeat it isn't the only metric and Enron was probablly at its lowest PE right before bankrupcy - that doesn't mean buy - it means do your homework to determine if its oversold.

I'd love to find a way to be alerted when stocks find their historically low PE, but is the only way I know how to check it. If anyone has a less manual way to check this statistic please blog back.

Cheers! -HPEguy

5 Comments – Post Your Own

#1) On February 03, 2007 at 2:06 PM, Greshm (85.40) wrote:

HPEguy [I think I may get the credit for that abbreviated moniker for you?]:

Thanks for the quick review of your Historical PE methodolgy. I don't know of any better source for that data/signal. If no one comes-up with one, maybe we'll each need to pick a sector or stock group or something and be the *DSM*, Designated Signal Monitor?

I'm not a big stock-shorter in my real account but I wonder if the HPE method works *in reverse*? You know, establish historical all-time PE highs and research shorting the stock if it's at that high PE again? Only a passing curious thought...not one I'll be spending time on.

Regarding your call on the housing stocks. Looks like indeed your method would have signaled a nice buy. I agree with your assessment of the growth prospects however. I'm a macro-guy and really watching the markets' forecast for the Fed Funds rate and expectations these days [as well as other Central Banks]. The long-hoped-for decrease in rates keeps getting pushed out on the calendar. The econ stats keep indicating a stronger economy than many of the forecasters had predicted [hence they have to push-out their rate-cut forecast] and more and more it is beginning to look like the FEW lonely forecasters who had been calling-for another 1 or 2 rate INCREASES this year may be closer to correct.

[An aside: to me this all indicates what I personally observed and felt in my gut but didn't necessarily have the data to confirm: That they had introduced SO much money into the system the first few years of this decade, that the economy is *frothy* and they'll have to go much further in the other direction with rates to slow the momentum--how else can one explain 17 RATE INCREASES in a row with no correction in the US stock market of more than 10%? It used to be the *three steps and a stumble* rule in past decades]

So, it is beginning to look more likely that the Fed may actually raise rates again sometime this year. And those housing stocks I don't think are factoring THAT one in yet. The Fed doesn't WANT to increase--they are rightly worried about creating damage/a financial *accident*--but they may HAVE to. Late last Winter into early Spring, the commodities markets went parabolic essentially calling the new Bernanke Fed inflationists. The Fed fought-back HARD with another couple rate increases [that weren't widely expected] and LOTS of rhetoric in Fed. Governor speeches. And anyone long in the commodities sectors were then reminded of the old adage, *don't fight the Fed*. Well, the PM [precious metals] stocks and commodity sectors have been moving up again this past month. The large Investment Banks/Wall St. Brokerage Houses [GS, BSC, MS, MER, LEH] really jumped this past week EXACTLY upon the moment of the release of the FOMC announcement [they had *sold the rumour* in the days leading-up to that moment, so they *bought the news*]. The read? The Fed is STILL accommodative. They may have more work to do to slow things down. The econ stats released later in the week have only further showed strength.

I don't think those housing stocks are prepared for the higher rates. And higher rates are what the Fed may need to surprise the market with again in their failed attempt to convince the markets they have inflation *under control*. The long bond rates have already been moving-up these past couple weeks or so, forecasting the coming higher-rate environment. Only making the outlook for mortgage rates look a little tougher?

There will be plenty more chances to buy the housing stocks...plenty. Hey, let's make a very friendly gentleman's wager: I will predict that TOL will indeed re-visit that $25 price again. Not meant as a contest between us, rather, a blending of our two methods: Your highly accurate HPE method and my surely less exacting macro look at market expectations for rates. I think we'll see the buy signal again and maybe then we'll see the next cycle growth prospects for the industry as nearer...

Sorry for my length once again!

I see you replied to a post of mine, thanks, but I'll offer any reply of mine there to keep from mixing our discussion topic strings.

Thanks again for the HPE lesson, I really do value it, Greshm.

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#2) On February 03, 2007 at 4:42 PM, HistoricalPEGuy (68.05) wrote:

Good comments. Along with the tax cuts, there was a large injection into the economy so I agree with your "frothy" assessment.

You can use the Historically High PE to sell. Again, you always have to be careful - I wouldn't short Google at its historically high PE because the market is still learning about the company, but it will work for more tried and true companies.

On E*Trade, you can pick a specific stock and a target low PE. Not bad, but tough to have 300 alerts going at once. Probably a nice thing to have for stocks you already own to see if its time to buy more or to sell.

As for TOL getting back to $25, you're on! I really think it was severly undersold at that point and the market is correcting for it. Only time will tell...

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#3) On February 08, 2007 at 4:12 PM, Greshm (85.40) wrote:

Today's news was nice confirmation on your (and my) near-term opinion on the housing sector. That, even IF the homebuilders and other related stocks have found a bottom, the prospects for decent growth are still not in sight.

TOL lost a dollar but $25 is still WAY down there. But I'm feeling a little more like I may get a free beer or something outta this!

Some more bad news about credit-sector and loan portfolio weakness and my concerns about a *firmer Fed* will dissipate and a *loose Fed* could show-up this Summer...

Talk to you soon, Greshm.

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#4) On March 01, 2007 at 9:11 PM, Greshm (85.40) wrote:

We can definately say sayonara to the *firmer Fed* possibility. And my current sense is that a lower Discount Rate by the end of the May FOMC meeting is getting more and more likely. If something really 'breaks', we could even get an inter-meeting rate decrease. But the occasional and very unwelcome *stubborn inflation data* news is the other side of that argument. We should likely know over the next two months one way or the other. In the meantime, here's what I want to know:

Is TOL *getting back to $25* on a closing-basis or intra-day pricing?!


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#5) On March 13, 2007 at 4:43 PM, Greshm (85.40) wrote:

Well, if one wanted that *second chance* buying-opportunity in those housing stocks, here's the chance!  Can't get much worse news out there one would THINK. 

TOL should try to make a valiant stand at this $27 level but I'm still betting it won't hold, ultimately.  Next stop $25 but I must admit it is gonna take a whole lot more bad news &/or one overdue bear market downleg to do it!  We should know this year though...TOL bulls should all begin chanting *c'mon Uncle Ben, c'mon Uncle Ben!*


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