This is the Value Investor podcast with Tracy Reinek, All Things Value All the Time. Welcome back, Value Investors. Is anyone freaking out yet? Are you getting a little bit nervous with what's going on with the inflation numbers, the Fed, what they may do?
This is in September, I'm recording this podcast September 14th, 2022. We just had one of the largest sell-offs on the stock market of the last two years. It turns out, but things have stabilized a bit, but a lot of people nervous out there. So what does that mean?
You should look at some value stocks, right? There could be a lot more value still to come. So I wanted to talk about an area that is cheap right now and just take a deeper dive into it, what might happen with it? Should we be buying in this area?
And it is the housing stacks. So it's been a while since I've talked about them because they used to show up in all my screens in 2020 and 2021. And now here in 2022, the Zacks rank has gone the other way. They're mostly number three's, holds, number four's, sells, or even number five's, the strong sells now.
And why is that? Because those estimates are being cut for mostly next year, but even some for this fiscal year, a lot of the home builders are on the fiscal year timeframe. But they remain dirt cheap. And I wanted to take a deeper look at what is going on with those earnings, what could happen as the Fed continues to tighten here in 2022.
Yes, they are going to continue to tighten even after the September increase that they're going to do. There is no pivot and inflation is still much too high. So they are going to continue to tighten. And that is going to impact things that hurt housing like the mortgage rates.
So Chairman Powell has talked about the pain, and he used that word quote unquote, pain, coming to businesses and consumers in the next couple of months or into 2023. So far, there hasn't been a lot of pain other than in the stock market, as we know, and on the inflationary pressures, we were all feeling it when gasoline prices spiked. We are still feeling it in other areas, especially in the food area. So we are feeling the stresses of the inflation, but unemployment is still looking good.
It's only at 3.7%. The weekly claims remain stable under 250,000 the last couple of weeks. So they've actually been trending down the weekly claims. That's the first time you're filing in your state to get unemployment benefits.
So it's a pretty good gauge on what is going on out there. Now, some people may lose their job and not file for unemployment because they are able to find something very quickly so they don't go through the problem of filing. But that's a good thing. That's a good strong job market if that is happening.
So we also aren't really seeing the big layoffs. There have been some headlines of people doing some layoffs, but when you look at Challenger Gray and Christmas's actual monthly data and they've been keeping it since 1993, and these are the layoff announcements. So it's not the actual layoff itself. It's just the announcement of it.
But it's at extremely low levels and through August is at the lowest for the year since they did start keeping track in 1993. So we're really not in a 2000 or 2001 scenario where those layoffs at especially.com companies really started to pick up in 2000. We're not there yet, but the Fed is warning that it could be coming down the line. So all of this is going to impact housing because there's two main components that impact the housing market is of course the first one, mortgage rates, and those have spiked.
And the second one is the job market. So the mortgage rates are already rising. As we know, they started rising in May. They spiked higher in June above 6%.
They did come back down into the fives, but now here in the fall in September 2022, they're back above 6% again. And they may go up there into the upper sixes perhaps or possibly even seven. So that's something to watch. And on the job side, as I just talked about, it's looking pretty good.
When you have your job, you're not as nervous and you're willing to buy a house when you are working and especially for getting a pay increases that we have been seeing in this labor market. So some of the things on the job side are still pretty good. So sales are already down at the new home builders. They talked about it this summer.
As soon as those rates spiked over 6%, the sales crashed down. Basically, nobody went to the sales centers. Not as many trips onto the website to take a look and to dream about that new house. But it did pick up again when those rates went below 6 back into the fives.
And they are seeing some cancellations, as you might expect. But many of those who are getting close to delivery on their homes are able to lock in a rate that will work for them. And they are mostly closing that obviously could change as we move forward. Some of them are doing great locks.
They're offering that to their customers. There are some more incentives now. But all of this is going to be a factor over the next year or more with the home builders. And all of this is going to impact the earnings for next year.
Now remember, their earnings and the revenue comes from the actual closing of the house. So they get the orders and that's all good to look at. And they'll have this big backlog. They will have some cancellations so that the cancellation rate is also something to watch.
And then they have to wait until the actual closing to lock in that revenue. And that's when you get the earnings. So the earnings are looking good for this year still because the home builders are able to close on most of the houses that went into contract last year. There haven't been enough cancellations or that kind of thing.
And if there are cancellations, there's new people stepping in to actually buy the house. So the earnings are still holding up here in 2022. But it's next year when the orders are on the decline. And so the backlog isn't going to be as big for next year.
And then we don't know what's going to happen with inflation, their margins, and whether or not they're going to have to do more incentives that's going to hit the margins and whether or not what's going to happen with the commodities that going in there. So they were already paying more for lumber, for labor, to get that garage door. The copper prices had gone up, paint prices, all these things that go into the new home. But some of those have come down.
So as a supply chain has improved, they've seen some relief on the inflationary pressures. And so the number went way down. It did spike again, but now it's down again. So how will all this play out?
We don't know yet. But I think it's pretty clear that the sales are going to be down. Eventually, they're going to have fewer deliveries. The last two years have been a record years, especially 2021 for the home builders.
So it's only natural that they're going to come off those highs and it's not going to be the record. So there could be some value trappiness in a lot of these names. But let's take a look at five of the top publicly traded home builders and see what's actually going on there. So the first one I picked is toll brothers.
I've talked about them many times. They are the luxury side. Ticker is TOL. I like them a lot.
I used to own them in the value investor. They will hold up a little bit better even as things get rocky because they're the luxury side and about 20% of their buyers pay all cash. So they don't care what's happening with the mortgage rates unless they have something else they have to sell to get into the house. So there are still some caveats there, but a luxury should hold up a little bit better.
So they are too cheap. P e a 4.6%. They do pay a dividend and it's now yielding 1.9%. So to date, these shares are down 40.5% and over the last two years, which included these record years, the shares are now down 3%.
So they had a huge rally. They've given it all up again because of the market conditions. Much much further to go before any of these home builders get back to the 2020 lows that hit when the pandemic hit, when everybody thought housing would be doomed. They really sank.
So they were dirt cheap then for sure. So much further to go till we get to those kinds of lows. Told brothers market cap of about 5 billion. So they're pretty big, but not as big as some of the others I'm about to talk about after them, but still pretty sizable.
So what do earnings look like? So they're on the fiscal year, they're fiscal 2023. So I'm looking forward to next year already. Those earnings expected to be down just 6.3%, however.
So expected to make $87 down from $9.47 this year, the record year, and they made only $6.63 in fiscal 2021. And so that doesn't sound too bad, right? Still above, you know, two years ago, still remaining elevated, but estimates were cut after the last earnings. And we don't know what awaits in terms of further slowing in the housing market over the next several quarters.
So this is all a little dubious. Everyone's being conservative and they're just cutting a little bit for next fiscal year. But that's something that you really have to watch with these home builders. So it's a ZX number four sell because of those earnings cuts, but it is pretty cheap at just 4.6 times.
Okay, moving on to one that's more mainstream, I would say more affordable type of housing linar ticker, LEN of their PES 4.4. So similar cheapness, as I said, all of these are cheap. And let's look at the earnings. So fiscal 2023, I'm already looking forward to the next year.
Those are expected to be down 17.5%. So down to 1387 from 1682 in fiscal 2022, they only made 1427 in fiscal 2021. So this is projecting to actually go below that. Unlike toll, which is still hanging out above this one's going below.
The year to date, the shares are down 36%, two years down 4.4. So they also have given back the entire rally here. They are reporting earnings. If you're listening to this in September, they're reporting on September 21st.
So they're on the fiscal year. They are one of the early reporters. So they're reporting fiscal third quarter. We're going to get some more insight on like, what are they seeing now that the fall is here and those rates are back up above six because a lot of them did say they saw improvement in August, more foot traffic, more people coming into the sales center thinking about buying once those rates were in the fives, but they're back up again.
And so this is going to be a key. Their conference calls actually on September 22nd at 11 a.m. Eastern time. If you want to tune into the conference call, I do recommend it.
They're at number four, a sell as well because of earnings estimates coming down. They do pay a dividend yielding 2%. So not too great on the dividends, but you are getting something, market cap of 20.9 billion. So they're much bigger than told brothers.
And as I said, they're kind of much more the average home, more of the entry level first time buyer type of home for Lenar. So that's a key market. We're all going to be watching. So Lenar, LEN.
Then I'm switching over to Polte Group, ticker PHM. They also are one of the big ones. I have nine billion. I thought they were bigger than nine billion, but they're up there along with some of these other ones.
And so they give a good idea of what's going on around the entire country with Polte Group and what do their earnings look like. So they're dirt cheap as well. P is just 3.5. So we're in the threes now, 3.5 dirt cheap.
In 2023, expected to be down 11% on the earnings. They're showing $10.01 versus 11.26 here in 2022. They're not on the fiscal year. So they're on the regular calendar year.
So we're still only in the middle of 2022. So these estimates are going to change. They made just 7.30 in 2021. So that's still above what they made in 2021.
You to date shares down 31.6% and two years, they're now down 13.7%. Also wiping out all of those pandemic gains, basically. Dividend yielding 1.5% now in Polte Group. Also keep in mind, some of these companies do have share buybacks as well as the dividend.
So you need to go to their investor relations page and see exactly what they're doing with their extra cash right now because it might not just be about the dividend. So that's Polte Group. P-H-M is the ticker. P-H-M.
They're in number three. Hold right now. Okay, then number four is DR Horton. ticker D-H-I.
They're one of the big guys as well. Market cap of $23 billion. P-E is just $4.1. And let's look at those earnings.
More of the same. Down 17.6% for fiscal 2023. So they're looking for 14.08 versus 17.09 here in fiscal 2022. They made 11.41 in fiscal 2021.
So still above what they made just two years ago. Twelve estimates have been lowered though over the last 60 days. That's for fiscal 2023. It is still a number three.
A number three hold probably because those estimates were lowered so long ago. So we're just waiting on the next earnings, which are not yet coming, but a little bit later than what Lenars are going to be. So we have to wait a bit. Year to date down 36.5%.
Two years now down 3.7%. So the story is more of the same. Wiping out those pandemic gains. But I did take a look at the five year on DR Horton.
Still beating the S&P 500 on the five year outlook. So five years up 123% S&P 500 up 78.6%. Because they did have a big bounce off those pandemic lows, which the two year chart does not capture anymore. Because we've gone way beyond the two years now from the start of the pandemic.
And we're heading into almost the three year mark soon. So the two years not going to capture that big spike up there. But the five year looks like it has. And so DR Horton, DHI number three hold, as I said, dividend yielding 1.3% for DR Horton.
And then I wanted to go with one of the smaller guys. There are some smaller publicly traded. They don't get as much ink out there. You might never have heard of them, but we've talked about them on various podcasts because they did show up in various screens.
This one is MDC holdings. It's just MDC the letters with the period in between. And the ticker is MDC. And they have a market cap of just 2.1 billion.
So you can see they are much smaller. I picked them because we have talked about them in the past. I used to own them in the value investor portfolio. But once it seemed the Fed was going to raise rates, we got out of our home builders stocks.
And this one pays the biggest dividend yield in the industry. It's now yielding 6.7%. And that's because year to date, the shares are down 47%. So they haven't cut the dividend.
They're probably not raising it either. But because the shares are down so significantly, the dividend has basically doubled and is now 6.7% yield. Over the last two years, the shares are down 29.6%. So really wiping out any of those gains that you had.
That's why we sold it out of the value investor portfolio. I used to own it in my own portfolio and I sold it a little bit after the value investor did as well. So that dividend wasn't worth it for me then. But could it be now?
Let's look at those earnings. P.E. of just 3.2, 2023, expect to be down 18.7%, however, on the earnings to 758 versus 932 in 2022. Now they did make 783 in 2021.
So it's not much below the 2021. Again, this is just what is happening out there in the earnings for right now. We're still several months away from 2023. The companies have not guided yet at all on 2023.
There's just way too much uncertainty on the input costs, inflation, demand, just basically everything and what the mortgage rates are going to be. So and even what the job market is going to be doing. So they're holding off until the fourth quarter before they give any kind of guidance. And so these estimates are likely to change.
They report in October, but three estimates are lower in the last 60 days for both 2022 and 2023. So that's what we're seeing with a lot of these companies. It is the number five strong sell because all those analysts are in agreement. They were all lowering.
And the Zax ranks said, eh, something bad is going on here. And they're right. The earnings are in the decline now. So that's how it gets the number five ranking.
Now, I did want to talk about KB Home. I didn't forget them ticker KBH. They also are on the fiscal year and they also report early, as I call it, early along with Lenar. So they're reporting on the same day on September 21st, 2022.
KB Homes and Lenar will both report earnings after the close. KB Home, smaller, but national home builder as well. Just 2.4 billion market cap. PE is at 2.7 times.
So this is among the cheapest now. We look at one. That's the question, right? I don't know.
They pay the dividend yielding 2.2%. But again, like some of the others, earnings expected come down, but not as much. So fiscal 2022, analysts are expecting 1024. So that's for this year.
Next year, they're looking at just 983 for right now. That's down just 3.9%. So not much of a decline. Like some of these others were saying, down 17, 18% already for next year.
Not as much here. They made just 605 in fiscal 2021. So all these numbers are still really elevated compared to just two years ago. So this is another one year to date, down 38% and two years now, down 29%.
So really hammering those who stuck around, even though you are getting that dividend of 2.2%. So I didn't really recommend sticking around in the home builders. Once the Fed was going to raise those rates, remember, don't fight the Fed. And in the industries where they're, you know, Fed sensitive, which is the home builders, because of those mortgage rates, you just had to get out and wait on the sidelines to see what develops, how much they decline.
And then that's when you get in again. So what are the catalysts for the home builder group? I don't really see much on the near term horizon. The Fed is going to raise again in September.
They're supposed to raise again two more times later this year. The mortgage rates could go higher. The housing market is ground to a halt, including an existing homes and in the new home sales. There's not a lot of incentive to want to buy the home builders as they navigate all of this.
So the only place I feel that the stocks have to go is down, especially over the next, say, six months to nine months, the stock market is forward looking. Eventually they'll see the light at the end of the tunnel and they'll say, oh, the Fed is done now. And those mortgage rates are going to come down. The will have a recession or a slowing of the economy, but then it will pick up again.
It will end as the CEO of RH Restoration Hardware said recently on their earnings call, they are expecting the next 12 to 18 months to impact their business pretty significantly with the slowdown in the economy and slowdown in home buying means slowdown in furniture buying as well. So 12 to 18 months, but the stock market will start pricing it in earlier than what the actual data will show. So that's why I'm on the sidelines because I think there's going to be another lake down on a lot of these stocks. It's only going to take one of them in the next quarter or two or even three to say, you know, oh, things are worse than we thought.
And they've slowed again. And cancellation rate is higher. Our margins are coming down and we're cutting guidance or whatever it's going to be. As soon as someone cuts guidance again, the estimates will be cut again.
The shares will go lower. But keep in mind, this is not 2008. These home builders are better capitalized. They're better managed.
They went through the nightmare of 2008. They learned valuable lessons. And so when this boom has happened, they did not repeat some of the mistakes from the prior boom. So they did not overbuild.
They are not sitting on a ton of extra inventory that they have to completely mark down and get rid of for no gain, no crushing the margins. They don't have that. They are slowing the spec home sales. A lot of them are slowing construction.
And so they might just have a lot sitting there. Things will change. But we still have strong demographics for the home builders. The millennial generation.
Yes, I'm talking about them again. They are the largest generation in US history. They are reaching the marriage age, the time when they want to buy homes. So that is all happening in big numbers.
So demand is still going to be there for the next several years. And actually Gen Z is also quite a large generation as well. And so a couple years after that, some of them will be entering into the home market as well. In addition, we also have the baby boomers, the formerly largest generation in US history, who are selling homes, buying new ones as they retire and just enter into another phase of life.
And so a lot of them want the new construction homes as well in the key markets of Florida, Arizona, Texas. Anywhere the sun is shining, as told Brothers, always says, people chasing the sun. And so both of those things will be catalysts going forward. Again, it's not 2008.
And so I still like the home builders as businesses. I'm watching them all, but I am still on the sidelines because the Fed is still aggressively raising those rates and the mortgage rates are going to impact. So I think I can get all these cheaper and you can get in later when the next cycle, the up cycle is closer to beginning or maybe already in full swing. We'll see.
But 2023 is going to be a struggle for the home builders. And we also have the inflationary pressures, which are also putting a lot of stress on everybody, including their business. And all these things are going to play out as we head into 2023. So for those reasons, I still feel that their traps here, as far as cheap stocks go and the dividend yields for the most part, other than MDC, which may or may not stay at that level, we don't know, are not enough to lure me in there.
And things are still this uncertain. So keep that in mind. I still, again, like the sector, but I need to see them go lower and I need to see once that happens, the insiders also diving in because they were actively buying over the pandemic period when their shares prices did go much lower and they saw that it wasn't as bad as what everybody thought. So once those insiders start to see the turn, they will buy their shares as well.
So keep that in mind. Okay. So we've covered the home builders. That's good to do.
And I will be tweeting out about what they say on the conference calls. So follow my Twitter at Tracy Rhinek. I'm on StockTwits and Twitter. So follow me on either of those platforms and you will get updates on what's happening with the home builders because I do like to follow this area.
So let me repeat the tickers I talked about. So you can keep them on your watch list. There was Toll Brothers ticker TOL. That's luxury.
Lenar ticker LEN. We had Pulte, one of the large national big time guys, PHM, P as in Paul, H as in Harry, M as in Mary. And we had DR Horton, also one of the big home builders, national home builders, D as in David, H as in Harry, I as in IBM. DHI, then we had MDC Holdings, one of the smaller home builders, but they paid the largest dividend in the group, 6.7% M, D, C, M as in Mary, D as in David, C as in Cat.
And then I threw on an extra one because they are reporting next week along with Lenar, KB home ticker, K as in K as in Boy H as in Harry, K V H is their ticker. And as always, be sure to subscribe so you're getting all of our podcasts. We are on Spotify as everybody is, right? We're on Apple Podcasts.
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