The Kelly Letter has been watching certain homebuilder stocks since last summer. With their recent recovery, some people have written wondering if we missed our chance to buy.
Well, we certainly missed a chance to buy, but I’m not sure it was the last chance. Homebuilders face big challenges, and they’ve been head-faking everybody for half a year now.
The one I’m watching most closely dropped to $13.50 in early October and then rose 29% by early November. “The train has left the station,” went the refrain in notes I received back then, “and you missed it!”
The stock then dove 31% in the following three weeks, rose 48% in the next three weeks, dropped 60% in the next month, and is now up 105% in the last week. There were lots of trading opportunities to be sure, but I’m watching and waiting for the long haul gain and want more confidence before committing my subscribers to that.
Anecdotally, I’ve been waiting for a major bankruptcy in the group to signal that a bottom is near. We haven’t had that yet. According to an article in yesterday’s Financial Times, we may get it soon:
The risk of bankruptcies among the big U.S. homebuilders has risen sharply as the economy has weakened and an end to the housing slump remains distant.
Credit default swaps on homebuilders, which act as insurance on corporate debt, suggest some of the biggest are at risk of failing to keep up debt payments. According to Byron Douglass, an analysts at Credit Derivatives Research, the most exposed are Standard Pacific, Hovnanian, Beazer, and Meritage . All are among the top 15 publicly-listed U.S. homebuilders.
Mr Douglass said bankruptcies were “highly likely” among top homebuilders. Homebuilding is viewed as being the sector most threatened by the slowdown as housing has been the worst hit part of the economy.
Defaulting on debt is “in most cases coincident with bankruptcy,” said Robert Curran, an analyst at Fitch Ratings.
It seems that patience may pay for now.
