• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Consumer Discretionary

There's No Place Like Homebuilders

How slowing home improvement sales are a positive for the group.
By MARTIN TILLIER
Jul 10, 2014 | 04:00 PM EDT
Stocks quotes in this article: LL, TCS, KBH, LEN

Wednesday, after market hours, Lumber Liquidators (LL) announced second-quarter same-store sales fell by 7.1%, and it significantly lowered its full-year 2014 profit forecast. Unsurprisingly, the stock has been hammered. In Thursday trading, the stock was recently down more than 20%. When I see movement like that, I look for opportunity. Unfortunately, I cannot find one in LL -- but that doesn't mean there isn't one at all.

I can't see an opportunity in the stock of Lumber Liquidators because the big drop is now over and looks entirely justified. The stock is not worth selling now, nor does it represent an obvious contrarian buy. There is an opportunity, though, and it lies in the other stocks that being dragged down with it, specifically, among the homebuilders.

The disappointing news from the home-improvement supplier tells us something about that particular business, and suggests that Tuesday's comments from The Container Store (TCS) CEO William "Kip" Tindell about a general "retail funk" may be accurate. I find it hard to reconcile a general consumer malaise with improvement in the employment picture, so I am inclined to conclude that both companies' dismal outlooks represent a downturn in home improvement specifically. Even if I am wrong about that, we at least know that people are spending less in that particular area. What baffles me is why that has led to a drop in the stocks of homebuilders.

Back when the new home market was stagnant, Lumber Liquidators and other home improvement stores were all the rage. If people couldn't or wouldn't move, went the logic, they would spend money on renovations and improvements. That made perfect sense and worked out well. What I can't work out now, though, is why the reverse wouldn't be true.

This morning I am hearing that the homebuilders are down, partly in reaction to the LL news. If that news, taken with TCS's downward revision, indicates lower spending on improvements, couldn't that mean that more people are considering actually moving? Of course, it isn't that simple; LL also supplies builders, so their woes could be, at least in part, the result of a slowdown in actual construction. Two consecutive months of seven-figure housing starts, however, would suggest otherwise, as would strong Q2 results from KB Home (KBH) and Lennar (LEN) a couple of weeks ago.

As you can see from the charts below, both KB and LEN have pulled back after positive reactions to their earnings numbers. Both look like a decent buy at these levels to me. Forward price-to-earnings ratios of 11.7 (KBH) and 12.5 (LEN) would suggest that, if nothing else, neither stock is particularly expensive.

Source: Nasdaq

When news surfaces and companies report earnings or change guidance, there is nearly always an opportunity created. Often, as in this case, that opportunity is somewhere other than where you might first look. Far from being a negative for homebuilders, a case can be made that slowing home improvement purchases are actually a positive. Whether you believe that or not, both KB Home and Lennar look cheap after the recent drops.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Tillier had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Consumer Discretionary

More from Consumer Discretionary

Apple's Price Charts Are Getting Badly Bruised

Bruce Kamich
May 12, 2022 1:10 PM EDT

Here's what the odds favor.

RH and Its Charts Don't Have That Homey Feeling Right Now

Bruce Kamich
May 12, 2022 8:32 AM EDT

The technical signals of the home furnishings provider indicate more downside to come in its stock.

Crocs Is Still Slipping to the Downside on Its Charts

Bruce Kamich
May 11, 2022 7:44 AM EDT

The footwear maker isn't seeing a lot of technical support at this point.

Screening for Deep-Value Stocks Turns Up a Pair of Possibilities

Jonathan Heller
May 9, 2022 10:00 AM EDT

A producer of small appliances and a maker of fishing, camping and kayaking gear pop up as possible value plays.

Bearish Bets: 3 Slumping Stocks You Should Consider Shorting This Week

Bob Lang
May 8, 2022 10:30 AM EDT

These recently downgraded names are displaying both quantitative and technical deterioration.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 01:44 PM EDT STEPHEN GUILFOYLE

    Stocks Under $10 Portfolio

    We're making a series of trades here.
  • 03:07 PM EDT PAUL PRICE

    Why Is Walmart Down Big Today?

    Besides its poor earnings report Walmart was way...
  • 07:14 PM EDT PAUL PRICE

    A New, Very Scary Movie

  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login