MDC Holdings, Inc. (NYSE:MDC)
CAPS Rating:
The Company's business consists of two primary operations, homebuilding and financial services.
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The Company's business consists of two primary operations, homebuilding and financial services.
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Yes Fools, you are seeing that correctly, another green thumb on a craptastic home builder stock. Good golly I must have gone mad...
Basically every RE statistic out there is signaling that another round of butt kicking is coming the way of home builders. The tax credit has expired (how did that work out for ya Government?), unemployment is high (and rising?), foreclosures are rising again, 50% of folks who were in Obama's miracle mortgage program have left/been booted, basically RE is a four letter word again.
Yes, times are tough indeed for home builder stocks.
However, I firmly believe now is precisely the time to start nibbling on a few shares here and there of your favorite home builder stocks, for instance the gem that is MDC.
1) Buying sectors that are absolutely hated usually works out well in the end, we are close to reaching those levels of hatred necessary.
2) MDC has a technical resistance in the $27/share level which we are quickly approaching and another solid support at ~$23/share.
3) Most importantly, times are tough for RE right now but that doesn't mean that things will always be this way. With the recent sell off, MDC (etc.) have already priced in crappy revenues/overall RE outlook for the next several years. So by buying MDC I am not advocating that things are all sunshine and lollipops and the RE market is going to magically rebound. No. Instead I am betting that even if the RE market takes years, literally years, to begin healing itself we have put in somewhat of a floor here in regards to stocks and RE in general. Basically, I don't see things in the RE market turning up swiftly, but nor do I see them falling further off a cliff. MDC has already priced in a pretty remarkably ugly forecast. It also should be noted, the most important thing for builders is the number of houses being built, not necessarily the price for which they get sold. Thus, we don't need to return to ridiculously high average price to income ratios like we had in 2003-2006 area, we simply need more housing starts.
4) MDC has loads of cash and arguably some of the best lands positions out there. See Floridabuilder (http://caps.fool.com/player/floridabuilder2.aspx) to understand the importance of land etc. This all points to the fact that MDC has essentially zero (0!) chance of rolling over and going bankrupt. You just need to ride out the storm.
5) Oh, and did I mention they pay out $1 per share on a yearly basis which gives us a dividend yield of ~3.8%. Furthermore, they have steadily been paying this amount out for the past 5 years (including the worst housing/stock market crash since the Great Depression), so ya it's pretty safe.
All this adds up to a solid risk/reward factor in my favor I believe. This won't be quick and it won't be a popular pick but enjoy the ~3.8% yield while you wait 5-7+ years for the housing market to bounce back.
Stock is "craptastic," and a "gem;" a short-term technical thesis in #2 gives way to a long term market timing pitch in #3 and a fundamentals pitch in #4; and in #5, a dividend on a negative cash flow company is held up as some kind of a favorable feature.
You may be right with the green thumb, but your explanation of why you think so was confusing.
Sorry my pitch was confusing for you, hopefully I can clear things up.
My point #2 is a short term technical thesis as you say; however I was implying that at this price level you have some decent support which should limit further price declines. Technical resistance levels can be good buy pints for the long term, not just the short term.
Points #3 and #4 are all valid reasons to enter into a long position and reasons why you should hold it for the long term. Things will eventually turn around in RE, that is inevitable.
To summarize, I was simply implying that now (~$27/share) is a good technical level to enter a position in MDC as there is a significant amount of support and several valid reasons why it should out perform in the long run.
Point #5, normally cash flow negative companies are unlikely to sustain their dividend, however as I pointed put, MDC has been able to continue this even though they have been cash flow negative the last few years because they have a huge cash pile. Cash flow is not the important thing to look at with builders right now anyway, that metric is not very helpful for this specific sector. When cash flows are doing well, builder stocks will have already risen and will no longer be solid buys.
Hope that helps:)
Thanks for clearing those things up. Makes more sense to me now.
I think you're right, by the way. I am no good at telling one horse from another, so I bought ITB instead.
Thanks for clearing those things up. Makes more sense to me now.
I think you're right, by the way. I am no good at telling one horse from another, so I bought ITB instead.
Thanks for clearing those things up. Makes more sense to me now.
I think you're right, by the way. I am no good at telling one horse from another, so I bought ITB instead.
After really thinking about this for a while, I've come to the conclusion that even though housing stocks have fallen quite a bit, housing prices themselves (in most areas) haven't really fallen all that much (10-30% in most cases). To me, housing prices themselves have to start going up for these homebuilder companies to actually make profits. Like a stock going up 500% and coming down 30%, I don't think the hate has even begun in housing prices. So, I believe we are going to see housing prices fall a lot more over the next few years. I think many homebuilders still are at risk of bankruptcy.
You know, blackeye, there's a reason the company that's pitched here is called MDC "Holdings" instead of MDC "Sellings" or MDC "Buildings." If prices fall to the point where it's not profitable to finish lots and sell them, many of these companies are able to lay off all their employees and "hold" their valuable real estate until such time as it is profitable. In other words, as I believe Option1307 is basically saying, this company is an asset play.
blackeye101
The thing about homebuilders that many people fail to understand is that they do NOT need the overall housing market to rebound in regards to price. Residential home prices have fallen significantly the last several years, but more importantly, the input costs for builders have fallen even further. Thus they can be profitable regardless or not if home prices rise again.
Focus more on the number of houses they are selling, not the price at which they are selling these houses. You need to remember that these homebuilder companies (especially MDC) were able to gobble up all sorts of prime RE for dirt cheap in 2008-2010. And I mean dirt cheap!
Therefore, they are positioned very well for the long term because they have a huge store of tremendous assets, bought on the cheap, that they can now sell at a profit essentially regardless of the average US home price.
People really need to understand this fact, hope this helps.
Picked up some more shares today @ 16.50. I love this company and long term is a solid buy.