Contrarian Idea for the PA
I am thinking about buying some homebuilders. Buy a basket of them, very small positions, and add to the position if I am early. Tol, ctx, dhi, kbh, len, mdc, and phm. Put 1-5% of the pa in a basket of those names, add to it if they fall further and sell on the bounce. My mental model is assuming this works like tech where if you get enough invested close to the bottom, you get a big pop off the bottom. Sentiment seems pretty bad, people are giving up on the idea that there will be a recovery around the corner and the stocks look like they are trading with that in mind. Havent pulled the trigger. In fact, havent considered it until about 20 minutes ago. Thoughts?
Note, I am not putting my professional reputation on the line with this idea, just the pa.
Note, I am not putting my professional reputation on the line with this idea, just the pa.
posted by Odoacer at
5:37 PM
11 Comments:
I know absolutely dick about this segment of the market, but I do know that these guys are writing down land this quarter... which implies that they've decided to take the big bath... which implies that things have bottomed and can only improve from here.
Of course, I am not sure who you're going to sell a house to if you are KBH or Beezer Homes. The marginal buyer is gone, perhaps never to return.
Totally on board. Starting to do it myself...(I know y'all think I'm a momentum investor, but that isn't exactly true). The news smells of capitulation.
Personally, I think if you are buying equities right now, you are a sucker. For real. That is the way I feel. Anyone that is hitting asks on equities at your firms, you are the bag holders. I would be selling your risky positions right now. Move your clients into closed end funds of leveraged loans.
There is only one way the equity markets are going to go. Do not be the bag holder.
One more thing. What is a home builder? Honestly. What is it? Why do they exist? This is the type of market where you ask why things need to exist. I would be looking at the Balance Sheet and starting to factor assets with a discount to current market value, then I would subtract liabilities. The residual I would discount by 50% and that is the point that I would buy at.
When someone does that, I may consider buying a figment of a company like a homebuilder. But until you do that, saying things like "go long home builders" sounds like something I heard on CNBC a month ago.
This is a different market, the people who adapt the quickest are going to win. Once again, this is not the same market.
I kind of agree with Kelly here. You need to do some real analysis and not just throw it out there because it is contrarian.
Once upon a time, buying airlines was contrarian. Four of the big six(United, Delta, Northwest, and US Airways) went bust. AMR came close. Continental never really threatened, so you would've only lost 70% of your money there.
Housing is getting worse, not better. Bad lending standards were not isolated to the subprime lender. Resets are still coming. Countrywide isn't holding 3 hour conference calls because things are rosy.
Toppe -
I was not talking about anyone in particular so do not take offense. This may be pompous but I feel like my perspective is worth something right now because things are worse than the news is makeing it seem and the news is reporting it every hour.
If you post a bid in this market it is going to get whacked. Hopefully the equity market maintains, but that is not what I am betting on.
My 2 cent homebuilder analysis was take the current P/B, subtract 20% for land write downs, and write off 20% of the inventory (50% seems a bit extreme to me). Calculate a new P/B and see where your at relative. That is your downside imho.
The airline point is a good one and perhaps my key assumption is that land is easier to liquidate (even in this market) than airplanes and union contracts. Still too early for the home builders perhaps.
MK, I dont get the sense we are going to get the bloodbath you are predicting although I am open the possibility. A 15% market correction over the next two months would not surprise me but without a major shock (terrorism, modern verison of Watergate, etc) 25% - 40% over a year or two seems remote.
Why do I get the feeling I am going to regret that last paragraph? The ironic thing is that I am usually the most pessimistic/cynical of anyone.
I did not think senior secured debt would trade at 89 cents on the dollar either. I did not think that BBB mortgage paper would trade at essentially zero. And I did not think that if that buyers in the debt market would say FU, just when things started getting juicy.
Just letting you know. It is a different world today, then it was 2 weeks ago.
Key questions as they related to equities:
1) Are the credit issues a market event or an economic/business event?
2) Will housing cause consumers to significantly pull back spending from here? Will it lead to a recession?
My sense is the credit issues are still a market event. There was probably a 10%-20% premium built into mid and small caps simply on LBO potential. That is going away. I am not seeing evidence it is directly affecting business activities (curtailing business investment, causing layoffs, etc). If anyone has evidence contracting this, I would love to see it.
I have no idea what to make of the consumer. For the time being, I am capitulating on the thought I can predict their behavior.
The current environment has yet to curtail business investment, but it is surely preventing acquisitions. However, I tend to believe that the economy is driven largely by innovation... which is driven largely by smaller and middle sized companies (AAPL not withstanding). These guys tend to put a lot of capital into their businesses. They aren't sitting with huge cash balances. And they can't borrow any more. This is purely mental model, but a lack of access to capital will shut the markets down.
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