The Good Ole Days

I just reviewed earnings for Lennar Corp (LEN) and as expected they were atrocious. I don't mean to pick on them since they have enough problems as it is, but while I was on the company web site, I came across a presentation from a sell side conference back in February 2006. The stock was at $60 back then as you can see below:



One of the slides in the presentation detailed the secular bull case for Housing. The reasons given were:

1) Demographics favor continued strong demand.

2) Land supply is constrained.

3) Strong balance sheet & liquidity drive expansion.

4) Market diversification.

5) Professional management teams.

6) Competitive advantage – economies of scale.

It's astounding to me how many institutional investors bought into this thesis. It's very difficult to resist the call of a bubble.

In defense of Lennar, they did present an alternative scenario in the next slide:

1) Rates rise.

2) Economy falters.

3) Unemployment up.

4) Affordability down.

5) Demand weakens.

6) Margins compressed.

Anyhow, I don't have to tell you how it ended and which scenario won out:






If you look at the last housing cycle for Lennar, it also shows a pretty interesting ride, and a great way to make a lot of money if your timing is right.



Disclosure - No Position in LEN.

Charts courtesy of Big Charts.

Are We There Yet For Homebuilders - An Update?

In September we blogged about the dangers of using stated book value as a buy signal when evaluating Homebuilders for purchase. The original post is here at this link:

Are We There Yet for Homebuilders - Part II?

My advice was not to believe the book values being used in quarterly balance sheets.

"do not use price to book yet as a buy signal. Book value is in flux and will continue to go down quarter after quarter. The safest thing to do is take the latest quarters book value and write off 30% and then slap a .75 multiple on it and then buy them there."

Well, it seems that a 30% haircut is not enough. Lennar Corp filed an 8-K disclosing that it sold some of its lot and land inventory at a haircut of 55% off the book value that Lennar thought it was worth just eight weeks ago.

The full filing can be read here at the SEC site.

The relevant quote is:

"As of September 30, 2007, the acquired properties had a net book value of approximately $1.3 billion and the sales price was $525 million."

Things We Wish We Never Said

California's Housing Market: How Much ‘Froth’ Is Out There?

A conference held in October 2005 sponsored by the Milken Institute.

"Although the market is cooling off, the demand for housing is real, and we will continue to see modest single-digit gains below 6 percent, he said."

-Emile Haddad, President, Western Region, Lennar Corporation

Lennar Stock Last Cycle

One problem with Wall Street is a lack of institutional memory. It seems that no one even remembers the last big downturn in housing that occurred in the late 1980's and early 1990's. I am posting a series of charts of different Homebuilders from that era. The first up is Lennar.

Two things are clear from this chart. First, this is not the first time that Homebuilders have gone down 75%, and second if you time this right on the upside, these stocks will be the buy of a lifetime.

It's hard to see in the chart but the stock looks like it bottomed out in October 1990 at around $0.55. This is down from the peak of about $2.05 in early 1987. Also, you will notice in the chart that there was a false rally after the crash of 1987. If you bought Lennar after the crash in October 1987 at $0.78 you saw your investment almost double in two years, before the stock fell to its true trough in October 1990. It would be interesting to see when the book value of Lennar stabilized in this downturn. Unfortunately, the SEC web site only goes back on line to 1994.

Are We There Yet for Homebuilders - Part III ?

New home sales were reported yesterday by the government. Aside from the obvious problems with this measure that I discussed here:

http://marketprognosticator.blogspot.com/2007/08/housing-depression-is-not-over-yet-part.html


It may be a useful exercise to see when this and other metrics bottomed relative to the stock prices of the Homebuilders during previous cycles. New home sales bottomed in January 1991, at a seasonally adjusted rate of 401,000. Months supply of new homes peaked at 9.4 months also in January 1991. This data was not reported until March 4, 1991, due to the lag time in collecting it. Also, at the time that the January 1991 data was released, an investor would not have known it was the bottom until several more months of data had been released. The chart below is a monthly chart of new home sales from 1963 to August 2007.



Lennar bottomed out in Oct 1990, and had risen significantly by March 1991. Other Homebuilder stocks have shown similar patterns of recovery.

The bottom line here is that if you wait until these metrics to bottom as your buy signal, you missed significant upside.