Homebuilder Sentiment: A Gift From A Higher Power To Short Homebuilder Stocks

Investment Research Dynamics

The National Association of Homebuilders released its highly subjective “homebuilder sentiment index.”  It hit a 9-year high.  Of course, the last time it hit a cyclical high, the housing market crashed shorly thereafter:

As you can see, peak confidence is associated with peak sales.  The housing market is already crashing in volume.   

The other factor was Lennar’s earnings released to today:

For starters, let’s not forget that all indications seem to indicate that the housing market hit a wall in August.   So LEN’s earnings released today are “looking in the rear view mirror” numbers.

But not only that, Lennar has blown smoke across that mirror, making it difficult to determine what’s real and what’s questionable accounting.   In fact, Lennar has not even filed an 8-K SEC disclosure, which companies typically file before they release their earnings report to the public.  I went to look for it after I scanned LEN’s press release and found several troubling aspects to the numbers they reported this morning.

The bottom line is that, despite the large contribution to LEN’s revenues from higher prices,   LEN’s gross margin was barely higher than for the same quarter last year.  Furthermore, they included several accounting “add-backs” to boost their net income.  Finally, like all these homebuilders, LEN has removed a significant portion of its interest expense from its income statement.  I won’t know just how much until they file their 10-Q.

My conclusion is that LEN’s earnings report is product of carefully managed smoke and mirrors.  Most of its gains came from the West region.  If LEN is counting on sales growth from the West going forward, they will be very disappointed because, as I showed with yesterday’s post, the West is crashing.

As existing home sales listings pile onto the market, and sellers continue to cut prices, it will force new homebuilders to compete by lowering prices.  Most of these homebuilders are not generating positive operating cash flow after accounting for the cost of their massive inventory stockpiling.  Lower sale prices will obliterate their operating earnings.

I am reitierating a table-pounding sell or sell-short on the homebuilder stocks.   The LEN report has given us an ideal opportunity to establish or add to short positions.  My Homebuilder Stock Reports go over the misleading accounting techniques thoroughly being used by these unscrupulous homebuilders.  I also provide ideas for capital management techniques given that this sector is highly volatile.  And I include a section that discusses call and put option strategies.

The bottom line is that today’s news is a huge gift from the stock maket gods, giving us the opportunity to make a lot of money off of other’s stupidity.