Beazer Homes USA, Inc. (BZH)

I know Sleazer homes well. I wouldn't bet on this company going bankrupt because they can offer massive dilution. However, their cash to debt ratio is one of the worst in the industry and similar to a private builder. Additionally, based on the number of lots they own finished, they are going to have a huge negative cashflow problem by next year. Raw lots require a significant amount of cash burn and they do not have the capability to really buy new finished lots on rolling takes. Another big issue with Sleazer is that they are in too many markets with smaller positions (overheads) vs in fewer markets with bigger footprint.

This is a red thumb to under $1 again

Beazer has been swimming naked!

I do not believe in following herds. I believe if you want to beat the market, you have to pick stocks that are contrary to popular thinking. Having said that, it may look hypocritical to see this pick being made the morning after this AP news report:

"NEW YORK (AP) -- Shares of Beazer Homes USA Inc. plunged in Tuesday's aftermarket trading session following a report from BusinessWeek magazine that federal investigators have opened a broad criminal probe of the homebuilder's lending practices, a number of financial transactions, and other matters."

Thanks to efficient markets, this news was already instantly priced into this stock.

Efficient markets stop there however. It seems that the popular feeling is that when industries go south it is always short-lived. A couple more months and the housing downturn will be over. This is where the market is wrong--and I'm right (geez that's arrogant!).

The ponzi scheme that fueled the housing boom is now in full reverse mode now. It took 5 years of incredible home price appreciation. It will probably take another 5 years to revert back to the historical trend. One down, four more years to go. The players that behaved greedily, unethically, and imprudently will get washed away or at least be transformed into a mere shadow of their former selves. (Don't worry about most of the upper executives. They will be just fine. Its the rest of the employees and shareholders that will get burned.) I am now adding Beazer to that list of players.

To borrow from Warren Buffett, "When the tide comes in, everyone finds out who's been swimming naked."

Beazer designs, builds and sells homes for single families across five geographic regions namely, West, Mid Atlantic, Florida, Southeast and Other. These regions also form the reportable business segments as well. Catering to such a large number of markets help the company to deal with risk in case some markets are weak.

Revenues for the year 2006 had improved 9.3% while the 1Q 07 witnessed a 27.4% decrease. Average sales price has improved 1% in the first quarter to $280,300. The number of homes closed declined by 30.5% and the net loss stood at around $59 million. Additionally a debt of almost $1.7 billion and a cash position of only $150.2 million mean that the company is highly leveraged.

The homebuilding industry had an amazing run from 1995 to 2005 with around 13.5 million homes being built during this period. But things have gone downhill since then. Speculative buying, inflated prices in some hot markets and variable interest mortgage have taken their toll on the industry. Endorsing the same, the first quarter of 2007 faced extremely low levels of demand, high cancellation rates and significant levels of discounting. Even competitors like Toll Brothers, a leading builder of American luxury homes have reported lower revenues.

Industry experts do not expect this weak environment to end anytime soon. The backlog at the end of the period was around 4221 homes and $1.29 billion in units and sales dollars respectively. The unit backlog is down 54% from last year and 17% from the previous quarter. Beazer has already announced that it expects sales to be at the low end of their 12,000 to 30,500 homes outlook for FY 07. Additionally, even if the company has an excellent spring selling season, these sales would not close until after September 2007 which is its fiscal year end. In such a hostile industry environment, it would not be advisable to rely on this scrip, with the company’s going expected to be tough in 2007.

What can I say? I'm a glutton for punishment. I think that the housing collapse is a bit overdone in the press, and when it's overdone in the press, there's a good chance it's overdone in the stock market as well.

Make no mistake, I could be wrong here - very wrong.

Some time down the road, perhaps on the order of several years, I think that those who buy homebuilders on the cheap will beat the market. Time will tell.

This stock, much like other homebuilders and subprime lenders is just waiting to collapse. I look forward to watching it fall in the next several months.

On Wednesday, (3/28/2007) it was revealed that Beazer Homes USA (nyse: BZH - news - people ) was being investigated by a number of government agencies for its mortgage business. On Thursday, in filings with the Securities and Exchange Commission, Beazer said it had received a federal grand jury subpoena.

Shares of Beazer were down 20 cents, or 0.7%, to $29.08, in Friday morning trading. A year ago, the stock traded above $60.

Housing will fall further

Home prices have gone up too quickly (way too quickly in some parts) and there's too much inventory. Housing won't get back on track until home prices come down and that inventory gets bought up. Beazer themselves expect that this process will take the greater part of 2007. Historically home buying also tends to be seasonal, with Dec - Feb averaging fewer overall sales, so 2008 is the best case scenario.

Beazer Homes has dropped sharply along with home building stocks. A good company selling well in markets not yet saturated and ones where prices might not fall....I hope!

I'd love to short them, but can't borrow their stock anymore!

Lots of talk right now about whether the housing market will have a soft landing or is crashing. Either way, I see house building stocks heading south faster than the S&P. Speculation is high right now and since the economic growth report missed its expected mark, I think the pessimist will win out for most large scale investors.

After so many months of great returns, I think investors are willing to take their profits and look elsewhere, especially if the overall market really turns south.

A Value Proposition

The number of houses sold fell by about 43% and they lost about $230 in the first three month of the year, more than last year. . Also, Beazer had delayed filings since last summer when it fired their chief accounting officer for attempting to destroy documents during an internal investigation. The investigations followed allegations that BZH arranged loans some buyers could not afford and violated many rules. All this prompted investigations by regulators....

All this and the economic slowdown which affected them directly, are signs that you need to keep away from them for a while....

do you want to lose the shirt off your back?

I'm bullish on housing

Beazer builds an excellent home with care and concern for the buyer. Home prices are affordable and the quality is good. The media is killing the home building industry with all its doom and gloom. Perception is one of the 10 indicators for measuring recession. If we predict bad things, guess what will happens!

Want to beat the market ? I mean, really really beat it ? then go against it and punch it in the face.

Take that, Mr. Market! Subprime, homes yeah ? Outperfom.

Part of the horror show that shows no signs of life...people are telling me things are bad..so with my trust in what they're saying..im going to short this garbage back to the ground.

Ugly fact: . EPS (ttm): -3.44 Look for a major reversal downwards over the next few weeks. This is just toxic.

Did Beazer change its business to the Emerging Market Gold Solar Oil and Shorting Bear Stearns ETF in the past week? No? So then it doesn't deserve a pop like this. I'll see you back at sea level, BZH.

Slumping housing market, SEC probe, questionable lending practices by it's finance division...hmm! Guess what direction I'm going.