Tag Archives: DR Horton

Short This Homebuilder Bounce

Last week and the week before, Pulte and Calatlantic (Ryland/Std Pacific merger) reported their latest fiscal quarter.  Both companies reported a decline in homes delivered to buyer (closings).  This was consistent with the new home sales reports, overall, for the 3-month period.  The home builders were hit after both of these reports, taking the DJUSHB from 600 down to 560 – or 6.7% – over the next 13 trading days.  Beazer is still down 20% from when I first posted the original research report.  It’s headed to zero, or close to it.

Yesterday DR Horton reported its Q4/Fiscal yr-end results and Beazer reported the same today.  While DHI “beat” earnings by a penny, it missed on the Street’s revenue estimates. Beazer missed on its revenue estimate.  It’s earnings vs estimates is useless because Beazer decided to dump $323 million – or more than 10x its operating income for the quarter – of non-cash “tax benefits” into its net income calculation.

While both companies, contrary to Pulte and Calatlantic, showed an increase in units delivered/closed, further analysis I’m sure will show some extreme measures were implemented in order to move inventor.  I’ll will have updated research reports on both and special research report offer sometime over the next couple of days.  If you want a head-start, I would suggest taking a look at this report, which will not be part of the research report special:  RED FLAG ALERT FOR THIS HOMEBUILDER

However, interestingly both homebuilders stopped investing in new inventory.  By this I mean on a net basis, they both reduced their inventories quite a bit during their Q4.  If the outlook for the housing market is extremely optimistic – per the NAHB builder “confidence” report – how come these two homebuilders reduced their inventory after building them up to levels that exceeded their 2005/2006 housing bubble peak levels?

On a quick glance at Beazer’s numbers, its margins took a hit during the quarter, which means it was offering its homes at a big discount.  DHI’s cancellation rate during the quarter popped up to 27% vs 23% for all of 2015, which is a huge red flag.  Among other indicators, it means that DHI’s reported order book is highly over-inflated.   BZH’s cancellation rate also increased during Q4.

Furthermore, DHI’s Numbers were not nearly as strong as the headlines in their press release. They “beat” by a penny, but there were several somewhat arbitrary non-cash adjustments that gave them the leeway to engineer a “beat.”  It also looks like like they underwrote the mortgages for a lot of their buyers which means they financed subprime buyers to the hilt. We know this because their “mortgages held for sale” jumped nearly 50% year over year. If these were conventional, non-subprime mortgage, they would be able to off-load onto FNM/FRE and not hold them for sale.   It also means that there will be mortgage loss write-offs in DHI’s future.

It’s highly likely that this quarter will be the “last hurrah” for homebuilder sales volume and rising prices.   Most Americans are sliding into insolvency and it looks like the Fed/Government has saturated the last of the population that makes enough money – for now, anyway – to support the monthly cost of home ownership.  For example, read this report:  Most Americans Are Too Broke To Afford To Buy A Basic Home.

Next Up:   Another bailout of Fannie Mae and Freddie are inevitable and the FHA will require one as well (FHA was 2% of the mortgage market in 2008, it’s 20% now).

DR Horton’s Latest Quarter: Lipstick On A Pig

Like Toll Brothers, DR Horton released impressive earnings.  I can’t figure out who is buying those homes given that mortgage applications have been declining almost every week (93% of all new homes are bought using a mortgage).  Perhaps a lot of the newly-minted part-time employees working 2 jobs per the latest Government report have amassed enough cash to pay for these homes outright…I would suggest that DR Horton has taken market share from competitors like KB Home and HOV.

However, an in-depth analysis of DR Horton’s financials shows trouble brewing beneath the surface.   My article posted on Seeking Alpha goes into details:

With its current level of debt, DHI is making a bigger bet on the direction of the housing market now than it had been making during the housing bubble years.

You can read the entire article here:   LINK.

A colleague of mine who is also short the homebuilders sent me this quick email message: “Bit of a squeeze in the homebuilders.  Looks like a last gasp.”   Although I underestimated the height of this latest bounce in the DJUSHB, the MACD/RSI momentum indicators are now extremely overbought.

Now is a great to short these things, especially if you are establishing a new position.  And because this is a volatile sector prone to short-squeeze runs, I’ve been very clear that about recommending always starting with partial positions and saving capital in case the stocks squeeze higher after you start your short position.   Now is also a great time to add.

All four of my homebuilder short ideas are great plays after this latest move (before this move I had recommended holding off on shorting the company in my July 30 report because it was getting very oversold and close to $10.   You can access my reports here:  Homebuilder Short-Sell Reports.