A popular saying among weather forecasters is that March comes in like a lion and goes out like a lamb. However, for homebuilders, March has roared in like a bear — and neither lamb nor bull has showed its face.
Some three weeks ago, after the Builder Confidence Index suffered its worst monthly decline in history — falling in its monthly reading from 56 to 46 — I cautioned that real estate sales could be next. Indeed, the building starts report confirmed that warning the next day, reporting a decline of some 16% from the previous month.
Interestingly, homebuilders and the SPDR S&P Homebuilders Index ETF (XHB) initially shrugged off the bad reports, blaming it on bad weather, and the XHB actually rose another 7% between mid-February and the first week of March. But let’s take a look at the carnage that has developed within the real estate sector since then.
Homebuilders like Hovanian (HOV), KB Home (KBH), Ryland Group (RYL), and Lennar Corp (LEN) have all dropped dramatically. HOV stock was at $6.07 on March 4, the day before a bad earnings report blasted the stock down 10%. HOV’s EPS of 17 cents per share for the fiscal first quarter was 13 cents worse than the Street’s estimates. Revenue was up 1.6% from a year ago, but came in at $364 million, far below the analysts’ expectations of $410.32 million.
As you can see from the accompanying chart, after the initial 10% decline, HOV stock has continued lower for another 5 consecutive days, and closed on Wednesday at only $4.90. The 50-day moving average has already begun to turn lower, which is a negative technical sign.
Even Ryland, which hasn’t had the pressure of a recent bad earnings report and sports an attractive price-to-earnings ratio of only 6, has been hammered lately. RYL stock tanked from $46.59 at the end of February to a closing price yesterday of $41.82 — a drop of 11%. LEN stock has also performed poorly over the same time frame, down 7%.
Like HOV, KBH stock has been through a bear of a month. It closed out February at $20.40 per share, but has steadily declined more than 13% since then. A Bank of America downgrade from “buy” to “underperform” didn’t help, but the stock was already beaten down considerably before that.