Maybe we have to stop taking our cue from the worst of breed and start taking it from the best of breed.
Last week we got the report from KB Home (KBH) that was an unmitigated disaster and spelled what looked to be the end of the housing rally. Given that so much depends on housing coming back, the KB Home debacle portended a rollback of the whole complex, everything from Stanley Works Black and Decker (SWK) and Home Depot (HD) to Whirlpool (WHR) and USG (USG).
Oops. Real bad call. Because it turns out that the fault wasn't in the home stars, but in KB itself. In fact, the chief home star, Lennar (LEN) really blew things away this morning and it is back to being game on, with the whole group rising with the prospects of increasing orders, improving gross margins, declines in cancellations and the hope that we are getting back on track in the home biz.
Of course, we probably could have bottomed in homes a few years ago if Congress hadn't seen fit to give a big handout to everyone who bought a new home, which only encouraged an increase in inventory. That's exactly what we didn't want, as my friend and colleague Matt Horween has articulated here many times. It created an unfathomable amount of new homes and when coupled with a huge tax boondoggle for the companies kept all of the publicly traded homebuilders afloat. I have no desire for any company to go under, but marginal players like Hovnanian (HOV) did the market no favors by continuing to pump out houses long after they were needed simply because they had the capital to do so.
Now it looks like the inventories are getting leaner. Yes, we had horrendous Case-Schiller numbers today, but they are about three months old. They showed a rather remarkable turn in the hardest hit areas, notably Miami and Phoenix. But you can see the home inventories pouring out of the banks when you look at the horrible numbers from Atlanta and Chicago, to name two newly-hard-hit areas.
Nonetheless, what happened with Lennar today is a reminder that when people shoot first in this business in 2012 and then ask questions later they are NOT being rewarded. Those who buy the shootings have been the winners because the shootings don't seem to be caused by anything negative. They are minor chords. But the major chords come from the best-of-breed plays and they are singing in unison whether from Home Depot or Macy's (M) or Chipotle (CMG) and Panera (PNRA).
Keep the KB Homes/Lennar bipolarity in mind when you want to take action. You just might want to be on the other side of the trade.
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