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.
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
KB Home (KBH): The stock ran up (around $19.57). Originally I said that they should sell stock… now they are doing exactly that. This is somewhat bad for the shorts (~34% of the float is short) as intrinsic value will move closer to the secondary offering price. I plan on waiting to see if the short thesis plays out.
KBH is up 16.4% after it announced a profitable quarter. A quick glance at the press release shows that the profitable quarter is entirely due to an income tax benefit. Operationally, the business has higher revenues and lower losses. Looking at the revenues for the 2012 quarter versus 2011, revenues were $424M compared to $367M. Total pretax loss was -$7.439M versus -$9.649M.
Homebuilder shares have been rallying strongly and there may be a short squeeze happening in KBH. 53.70% of the float is sold short according to Yahoo Finance. It may be possible to make a small profit by shorting into the squeeze.
KBH is GAAP unprofitable and has negative cash flow from operations. Either way you look at it, it is unprofitable. It seems clearly overpriced as it has a price/book ratio of 2.85.
