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KB Home's Orders Data Not Strong Enough


A bet on any homebuilder now is risky at best.

Asian stocks got pummeled overnight. The Hang Seng and the Nikkei were off 2.59% and 1.32%, respectively. European stocks, however, were in positive territory early this morning. And here in the US, we're currently trading higher.

Here's what I'm seeing this fine Wednesday morning:

KB Home (KBH):
The homebuilder was out with its fourth-quarter numbers. But it wasn't the bottom line that drew a great deal of attention in Tuesday's session; it was the orders data. It turns out, net orders were up 12%. That sounds great, but the feel was that the number could have been stronger.

My two cents:

1. I think a bet on the homebuilders is a sucker's bet right now. These stocks have had a heck of a great run (from the lows ), and I see little upside (in the near-term) from current levels given the ugly earnings outlook. For the record, KB Home is expected to put up a pretty big number in the red in 2010.

For me to get more excited about this space and about this stock in particular, I'm going to need to see a pullback in share price -- maybe to the high single-digits. In the alternative, before I even pondered bellying up, I'd want to see a dramatic shift in the earnings outlook for 2010 and feel much more comfortable about the prospects for 2011 and a couple of years beyond. But to tell you the truth, I see the first scenario playing out first.

MGM Mirage (MGM):
In yesterday's session, the stock was on a roll, hurtling higher on pretty heavy volume. In case you missed it, the shares closed up after Goldman goosed its rating to Buy.

My thoughts:

1. I like this company (and wouldn't mind having a drink at the Bellagio as I figured out where to have dinner tonight). But that doesn't mean I want to saddle up to the shares right now.

2. I'd like to see the company put up a full-year EPS number in the black first -- or at least feel like it has a great chance of doing so -- before plunking down around $12.

3. I'd also want to get the sense that the travel business was going to shoot back in a big way sometime soon. So, although it has breathtaking properties, there could be a better entry point -- possibly later in 2010.

Heinz (HNZ):
Justin Sharon points out in his article this morning that Morgan Stanley slapped an Overweight rating on the ketchup folks.

My take:

1. Although ketchup hardly qualifies as a sexy story, I'm rather smitten with this company. I'm thinking that with average people feeling a bit more confident in their financial well-being, some might reduce usage of generic brands and splurge a little more for Heinz Ketchup and its other products in 2010.

2. Have you seen the earnings estimates? It's expected to put up $2.82 this year and grow its EPS to $3.06 next year. I think it's worth somewhere in the upper $40s -- or, dare I say, low $50s.

Morgan Stanley placed an Overweight rating on this company, too.

Although the stock has been on a tear and there's a chance the Morgan Stanley rating could give it an additional goose, I'm thinking Mastercard is approaching fair value. It trades at about 18.4 times the 2010 estimate, and at this point, I'm just not into it.

Have a great day!
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No positions in stocks mentioned.

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