Moving Into KB Home
Like everything else, the homebuilders have become a trading instrument.
While I listen to you play your love songs
All night long for me, only for me."
- Our House (CSNY)
Potentially one of the best album covers of all time, Deja Vu, released in March of 1970, had a certain "Butch Cassidy And The Sundance Kid" feel to it. If you don't own this album you should go out and buy it today - and yes, I use the term album still to this day. You can't help but getting a warm and fuzzy feeling after listening to "Our House": it may, in fact, actually stimulate some to pursue home ownership. That being said, owning any securities that have direct or indirect exposure to the U.S. housing market has been anything but warm and fuzzy.
I think, for the short term at least, that things may be ready to change. KB Home (KBH) reported its 3Q yesterday and it was not a pretty picture. The number five U.S. home builder reported a net loss of $35.6 mln compared with a profit of $153.2 mln in the 3Q of last year. The loss was despite taking a $438.1 mln gain from the sale of a 49% stake in its French unit, Kaufman & Broad. Of course the icing on the cake was KBH taking a pretax charge of $690.1 mln and $107.9 mln to write down the value of unsold inventory.
So the question that begs to be asked is "Where is the opportunity in this mess?"
Well, indulge me for just a minute. Like everything else, the homebuilders have become a trading instrument. A bullish view on KBH, for example, is not a endorsement that things have turned on the U.S. front-- quite the contrary, in fact, as I think we are still a good six-nine months from bottoming out. But getting long KBH for "a trade" may be a smart play.
On the show Fast Money earlier this week, I stated that KBH would report a terrible quarter and it did - but no great surprise there. Didn't exactly have to pull out the crystal ball to figure that one out. But I also said "KBH is going to make a 52 week low on about 10 mln shares of volume and if that in fact happened you get long the stock". Well, yesterday KBH came within one penny of making a new 52 week low and the trading volume was 9,498,200 shares. You know what? Close enough! The price action yesterday was worth noting as well. After bottoming out at $23.80 the stock rallied and closed at $24.71 - posting a 2.57% gain for the day.
Now let's look at some technicals. KBH was a $56 stock in January: not all that interesting, I know, but I mention it for context. Although further write downs are always a possibility, at 0.80 times price/book KBH is closing in on some very compelling valuations. But what may be most compelling is the large short interest in the name. Closing in on 25% and with more shorts jumping on board yesterday, KBH is beginning to get that "coiled spring" feeling that scare the shorts more than this three game home series against the Florida Marlins scares the most ardent Mets fan.
Let me reiterate, this trade does not constitute an "all clear" signal for the industry -- it is still a mess -- but we always have to look for trading opportunities and I think we have found one with KBH. UBS initiated coverage on the homebuilders September 25. It rolled out KBH with a "buy" rating and a $33 price target. I will turn a blind eye to the fact that UBS lowered that target price from $33 to $28 today.
I think we can see $29 here in KBH on what I think will be a short term bounce. I would be "stopping out", however, on any close below $23.50. As my man, "The Lone Wolf" and Prof. Jeff Macke, would say, "We are just dating KBH, this is not a marriage!"
So buckle up for what is sure to be a bumpy ride. But I have a way to make that ride a bit more tolerable - slip Deja Vu into that 8-Track of yours - the ride will still be bumpy, but you will enjoy it a whole lot more. And yes, I said 8-Track.
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