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Seven Reasons Not to Enter Lennar


Homebuilder sector likely to leave investors out in the cold.

While the number of folks slapping additions onto their homes and the number of contractor trucks circling my block at all hours has decreased substantially from a few years ago, things aren't in a wild free fall. In fact, there does seem to be some, dare I say, stability in the residential housing market.

In my neighborhood, there appear to be fewer homes for sale than at this same time last year, and it seems like prices are no longer dropping like a Seattle rainfall.

However, this stability isn't likely to get me to belly up to the publicly traded homebuilders. In fact, today I'd like to hone in on Lennar (LEN), and give my take on that company ahead of its earnings, which are due out on the January 7, 2010 according to CNBC.

1. From a top-down view, there were a number of tidbits that made home-buying an attractive proposition this past year. What might be termed a colossal inventory of homes for sale and low prices were two of those factors. Low interest rates were another. But the really crazy bargains no longer seem to be as plentiful. Additionally, interest rates appear as if they could rise from here, and even a point up from here could have a head-smacking impact on affordability and demand. The still-lousy employment situation also has me convinced that we aren't going to see huge lines for mortgages, or for that matter, mortgage brokers waiting in anticipation over the next couple of quarters.

2. Of course, some folks will still buy out of necessity and things still seem better than before, so I don't think 2010 will be as horrible as 2009. But will the results we see justify the stock prices that are out there currently? I'm not so sure.

3. Right now Lennar, which trades in the double digits, is expected to put up a loss of more than $0.70 for 2010. I don't think hope of future profits is something people will continue to hang their hats on.

4. Remember that many investors and would-be homeowners have seen their equity portfolios (and thus, potential down-payment funds) roar back big time this year. But if air is let out of the balloon, or if it pops, it could have a lousy effect on demand. What might cause that? Concerns over rising rates, worries over America's rising debt levels, and/or the ability of publicly traded companies to meet Street expectations.

5. As far as the fourth quarter that's due out is concerned, analysts are looking for a loss of $0.47. It's possible it could hit that number, but it's nothing to write home about if it does. And I'm not expecting any blockbuster announcements from management upon release.

6. As I've said in previous articles, Lennar is certainly not the only stock in this space I'm presently cautious about; Toll Brothers (TOL), Hovnanian (HOV), and KB Home (KBH) are companies I remain skeptical of bellying up to, but will keep on my radar screen.

7. Don't let my doom and gloom put you off entirely. I do think this space will come back, and that there will be a time to vigorously bid these stocks up. But by no stretch of the imagination is that time right now.

Hey, have a great day!
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No positions in stocks mentioned.

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