In the past, I’ve written various posts about shorting US homebuilders. This post look at lessons that could be learned from the experience. I was largely right about which companies were the worst. However, I was hurt by the favorable macroeconomic environment for homebuilders.
Comstock is a distressed homebuilder that defaulted on most of its debt in 2009. It allowed many properties to enter foreclosure while it worked with its unsecured lenders to re-negotiate/amend its debt. Currently, the company is still in a precarious position. It is effectively borrowing money at 20% (from insiders and private investors) while it tries to convert its inventory of land into cash.
Over the past few years, it has been unprofitable and has seen its revenues decline. Since 2006, every year has been GAAP unprofitable except for 2011 (where the company was profitable because it won a lawsuit). Comstock trades at a price to book ratio of 8.74 (higher if you take out capitalized interest).
In the past 12 months, homebuilding stocks have jumped in anticipation of a rebound in housing prices. So far, the rebound hasn’t even occurred yet! Home prices have stayed roughly flat since 2009.
While I don’t think that I am any good at predicting future home prices, it seems to me that some homebuilders are overvalued. There are some homebuilders trading well above their book value despite being unprofitable. Continue reading
