Story from the Wall Street Journal
Home builders suffered another year of painful losses in 2008, and the most successful analysts covering the sector were those able to grin and bear it—or at least be bearish on it.The top analyst in the sector, Kenneth Leon of Standard & Poor’s Corp., a division of McGraw-Hill Cos., employed what he calls the “cockroach theory” in making several prescient calls about builders facing rising leverage and cash-flow issues.
“If there is one, there is likely to be more,’’ says Mr. Leon, 54 years old, in explaining his theory. He says when a few builders had liquidity issues early last year, it meant other builders with weak balance sheets would likely face similar problems. One builder that drew his attention was Hovnanian Enterprises Inc. He rated the stock a sell in early September, capturing a decline of more than 70% through November, when he moved it back to hold.
Mr. Leon also captured big declines with timely sell ratings on builder Meritage Homes Corp. and on Sealy Corp, the bedding maker that was hurt by the deepening recession.
He predicts that the home-building industry and Michigan furniture manufacturer will recover by this year's fourth quarter and that builders’ orders will begin to grow at that time. But he’s staying neutral on the industry because he says home prices will continue falling through 2010 as the supply of foreclosed homes for sale remains high.
“A sustainable recovery for the home builders requires a major reduction in housing inventory,’’ Mr. Leon says. His top picks are Pulte Homes Inc., Toll Brothers Inc. and MDC Holdings Inc., which he sees as well-capitalized builders.
No. 2 analyst Christopher Agnew, formerly of Goldman Sachs Group Inc. in New York, made some good calls on the real-estate-related niche of office-furniture makers by anticipating a big contraction in the financial-services sector and waning demand for new office space, hospital cabinets. Some of the furniture companies, which do a sizable amount of international sales, also were hurt by the declining value of the euro and the British pound, Mr. Agnew says.
Mr. Agnew, 38, had a sell rating on furniture supplier HNI Corp. through much of 2008, capturing declines that totaled more than 60%.
Mr. Agnew, who is now on the job hunt, says that based on historical trends, office-furniture makers will likely continue their move off their lows as the rate of year-over-year revenue declines starts to decelerate, even though the industry is unlikely to experience meaningful revenue growth until at least the end of 2010.
David Goldberg scored the No. 3 spot by navigating the volatility among home builders. For example, he put a sell on Meritage Homes in September, just before its stock fell 65% in about six weeks. Sensing the selling was too extreme, Mr. Goldberg switched to a buy rating in late October through early November and captured a bounce in the stock.
Mr. Goldberg, 31, an analyst in New York for UBS, part of Switzerland’s UBS AG, believes a recent rally in the home-building sector is premature. “We think the trough in the market is coming at end of the year,” he says.
His top picks are Ryland Group Inc. , which owns just enough finished house sites to feed demand, and Toll Brothers, which has ample cash reserves .
