On Homebuilders
Bill of Absolutely No DooDahs began his May 31st post entitled “My Homeys” by writing the following:
“Rarely has there been a single segment or industry as universally loathed as the one I’m writing about today. Almost every stock I’ve screened from this industry has double-digit negative 52-week returns and short ratios over a week to cover. This industry’s P/E is below 5.5 on average, and its PEG and Price/Sales are 0.4 and 0.5 respectively. This industry’s Price/Book ratio is hovering close to 1.3, a rarity for a set of businesses with double-digit Return on Assets. I’m talking about, of course, the homebuilders.”
Bill has written three excellent posts about homebuilders. I highly recommend reading them, especially because you will find I’ve sprinkled quotes from those three posts throughout the post you’re reading now. There’s no need to re-invent the wheel. If Bill said it better first, why shouldn’t I quote him instead of struggling to find a different way to say the same thing?
Here are Bill’s three posts (in chronological order):
A Contentious Topic
Although nearly three months have passed since Bill wrote that paragraph, it remains an appropriate introduction to a contentious topic. I’ll try to take the discussion in a slightly different direction by presenting some questions (and hopefully a few answers) that seem most likely to help investors form actionable judgments about the homebuilders.
Naturally, the first question is why housing in general and homebuilding stocks in particular are such a contentious topic. Two culprits immediately spring to mind: self-interest (enlightened or otherwise) and the financial media (almost certainly otherwise). These two forces have a hand in the forming and fomenting of a great many controversies. So, it’s hardly surprising to find them at work here.
The self-interest is genuine. Many Americans own a house. Some Americans own more than one house. This second group is probably somewhat more likely to watch CNBC, read The Wall Street Journal, etc. So, the financial media takes that kernel of genuine self-interest and blows it ups.
The manner in which it does this is particularly interesting, because it affects the way Americans in general and investors in particular think about the subject.
Discussions of the housing market often involve talking heads and statistics. The talking heads naturally present opposing views. The statistics are, of course, meaningless without a point of reference.
Obviously, a series of historical data could provide such a point of reference; however, a series of historical data is complex, backward-looking, and above all else not a good way to keep an audience’s attention. In contrast, estimates are simple, forward-looking, and a bit more exciting. So, estimates win out. Not just in the reporting on the housing market, but in financial reporting as a whole. Estimates pervade the financial media.
While they can be very useful, estimates do carry the unfortunate side effect of turning shades of gray into either black or …
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