Saturday, June 7, 2008

Homebuilder Values Overshot to the Downside?

We saw here with Orleans Homebuilding that markets can be fairly adept at figuring out whether book values will increase or decrease, but that they tend to overshoot their marks, offering buy opportunities when they overshoot to the downside. But was Orleans a one-off? Let's look at a few more builders to see if there's a common theme emerging.

Here's a look at Dominion Homes, operating in 3 states in the US:
We do see here once again several occasions where the market predicts the direction of book values before they occur (1994, 1996, 2001,2006). However, we do see occasions where the market is wrong as well, with a big drop in 1998 and 2002. Once again, we also see that on almost each of these occasions, the market overshoots, offering dramatic buy opportunities in 1996, 2000, and possibly today?

The next chart is of California Coastal Communities:

This one is a bit perplexing, with market values taking a huge plunge in the early nineties. Market value continues to underperform book throughout the 2000s (until a bout of irrational exuberance in 2004), suggesting for some reason investors were turned off by this company. I'd be interested to dig into why this was trading at such a sharp discount.

The last chart is of Meritage Homes:
This is a bit more typical from what we saw earlier, with markets correctly predicting directions of book value, while nevertheless overshooting both to the downside and upside, providing opportunities when market values are much less than book values.

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