Recently, a CEO of a public company said something quite fascinating to me: You should really think of a company in terms of layers, because it makes the analytical process less overwhelming, and this makes it easier to identify thesis flaws.
But let's zoom out to the broad-market level, where we see the indices are rotting following four red sessions and assorted commentary that suggests the plague could spread into month's end. With that in mind, here's how I view some of this week's pressing news. Oh, and let's be clear: "Pressing news" has nothing to do with isolated events that get blown up in the Twittersphere (ahem, BlackBerry (BBRY).
Homebuilders: The 'Compares' Matter
I love whipping out the old sell-side jargon. Lennar (LEN) and KB Home (KBH) shares popped in reaction to strong gross-margin-fueled expense beats, which normally tend to happen later in the recovery cycle. Fair enough. However, be hesitant about jumping into the names. Historical uber-bullishness from the sector's CEOs has returned -- another thing Fed chief Ben Bernanke has caused -- and that sets up shareholders for future letdown. After all, fundamental trends have taken a turn for the worse on a sequential basis.
- Deliveries: Third quarter: up 37% / Second quarter: up 39%
- New orders: Third quarter: up 14% / Second quarter: up 27%
- Backlog: Third quarter: up 32% / Second quarter: up 55%
- Comments: "Moderating sales pace" confirmed emerging trends that surfaced on the second-quarter earnings release.
- Spotted: New orders declined in the Central and Southeast Florida regions, but were up in all regions in the second quarter. Oh, and remember this affordability index?
- Homes delivered: Third quarter: up 6% / Second quarter: up 39%
- Average selling prices: Third quarter: up 22% / Second quarter: up 25%
- Less-favorable-results presentation: Third-quarter price increases ranged from up 15% in the Southeast to up 28% in the Southwest. This compares with the second-quarter, when increases were up 15% in the West and Central, up 26% in the Southwest and up 16% in the Southeast.
- Backlog: Down 3% on a unit basis.
Avoid What You See
Peter Lynch championed the approach of buying shares of companies that appear to be doing things correctly in everyday life. Brian Sozzi takes that a step further and says you should avoid and short what you see failing miserably. A good example of that would be Coach (COH).
The below Facebook (FB) advertisement is not a positive sign on the quarter from Coach -- and, to me, it's indicative of still-poor traffic that is causing excess inventories prior to holiday flows.
(As a side note, what a lame brokerage upgrade Facebook got Tuesday! Do your job six months earlier, guys. Analysts are paid $250,000 a year, plus bonuses, to predict the future -- not report the present.)
And in Closing
I have warned as many people as possible -- from clients to these digital pages -- on J.C. Penney (JCP). On Tuesday the stock broke through my firm's $12 price target. This is no surprise, given what I learned from the company on a call earlier this month. I think the back-to-school season was quite bad, and I expect news on a penalizing capital raise to materialize prior to quarter-end -- that is, October.