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Using Today's Rally to Short Some Trash



May 10, 2010 – Comments (1) | RELATED TICKERS: BZH , SPF.DL , KBH

I have a dearth of red thumbs in my CAPS portfolio right now, possibly because when I initially returned to playing the game I used my real-life portfolio as starting place.  Of course, I soon came to realize that I'll never be able to move back up the CAPS ladder with that few picks so I have been adding to my CAPS port slowly but surely.

After reading T2 Partners' excellent presentation from the recent Value Investing Congress I decided to use today's explosion in the markets to add some red thumbs on a couple of trashy homebuilders.

The head honchos at T2, Whitney Tilson and Glenn Tongue, strongly believe that there is more pain to come in the U.S. housing market, and as much as it pains me as a homeowner to admit it they make some very valid points.

Home sales figures have been artificially inflated over the past several months by the government's recently expired $8,000 first-time and $6,500 repeat buyer tax credit.  Furthermore, tons of people have been rushing to lock-in fixed rate mortgages while rates are at a record low level.

Even with this recent surge in home sales, the level of inventory is still at a very high level historically speaking.  As of March, the U.S. had 3.6 million homes on the market...about 8.5 months worth.  That month's supply will look even higher as sales begin to tail off as a result of the expiration of the tax credit.

And the level of inventory is still growing.  If one looks at the likely defaults amongst those who are behind on their mortgage payments (nearly a quarter of the homeowners who haven't made a single payment in the last twelve months have yet to be foreclosed upon), the current inventory level balloons to over 7 million units and rising.

You get the idea...check out the outstanding T2 presentation for more information on this subject.

For the purpose of CAPS, I decided to short the most highly leveraged and most over-valued public builders.  My new red thumbs include these gems:

Beazer Homes (BZH): Debt-to-Equity Ratio = 4.23, Equity to Inventory level = 4.97, Price-to-Book Value = 1.06

Standard Pacific Corp. (SPF): 1.31, 2.36, 1.59

KB Home (KBH): 0.95, 2.44, 2.29

Again, these are CAPS-only trades.  I'd love to hear others' thoughts on the housing industry in general and these companies in particular.


1 Comments – Post Your Own

#1) On May 10, 2010 at 11:31 AM, JakilaTheHun (99.91) wrote:

I agree with Tilson - don't think we're near the end of the pain for the housing sector just yet.  Might be a few more years (at least) for a real rebound.

All the same, I would not short KBH.  They've made a lot of smart moves during the downturn and have moved into the DC market, right into prime territory (Inside-the-Beltway).  They might be one of the big winners of the crisis, even if the pain is likely to extend for awhile in the homebuilding sector. 



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