Update

After last night's post, I got up this morning and saw this article:

http://money.cnn.com/2007/10/24/news/economy/builders_forecast/index.htm?postversion=2007102414

Thought I would share. These fellows don't think it's time to buy homebuilders yet.

Homebuilders: CTX, DHI, LEN, PHM

Talk about a depressed market. Housing glut, credit crunch, burst bubble...call it what you will, the real estate market is in disarray after the meltdown that has both affected and threatened the entire economy. This being the case, I thought I would take a look at some of the Homebuilders stocks - a whole group that has been totally rocked.

I decided to cover these from sort of a contrarian strategy. The market has been described as bipolar - bad information will send it into an overreactive depression, while good information will send it inexplicably higher. I am not saying that the Homebuilders are necessarily undervalued for the short term, I think it will be some time before this business is as profitable as it once was, and for obvious reasons. It is basic supply and demand. When housing prices were rising at an unprecedented rate, more and more people jumped into the home building business. The faster you could build them, the more money that could be made. This led to oversupply, which in turn led to thousands of houses sitting on the market. My theory is that the market will make an adjustment back in the other direction. The weakest companies will go out of business, while the strongest companies will persevere until there is a greater demand for new housing again. Enough of my editorial, let's look at the stocks.

I am going to compare 4 of the largest homebuilders - Centex (CTX), DR Horton (DHI), Lennar(LEN), and and Pulte (PHM).

P/E and PEG ratios
Centex reported a 644M quarterly loss today. All the companies are losing money. Their houses aren't moving, and prices are falling.

As far as the ratios go, this is a convoluted area because the companies aren't earning at all. They aren't earning and they aren't growing. They are losing money and shrinking. How do you figure a P/E for a company that just went 644M into the red? Hint: You end up with a negative number.

Basically, we can't evaluate these companies on this basis, traditionally one of the most popular for finding undervalued stocks.

Cash and Debt
CTX has 228M in cash vs. 5B in debt (ugh!).
DHI has just under 5M in cash vs. about 5B in debt (even worse).
LEN has 128M in cash and about 3B in debt.
PHM has 74M in cash and about 4B in debt.

Advantage - I don't know if you could say anyone has much of an advantage, but the numbers look a little better for LEN than the others. All of these stocks are going to have to possibly look into selling some of their assets in order to pay their debts. Not a promising outlook.

Dividends
I typically love stocks that pay dividends, and all of these stocks pay pretty decent ones. My question is - why are you paying dividends in your terrible financial state?

Price to Book Value
The stat that really jumps out at me is the Price to Book Value of these companies.

CTX: 0.64
DHI: 0.71
LEN: 0.71
PHM: 0.64

What this means is, all of these stocks are trading below the value of their current assets. That fact makes these companies potentially attractive in the future. If you can buy a dollar for 64 cents, it's usually a good idea. Of course, if the company goes out of business, then you just own a piece of paper.

Conclusion
I don't know when or if these stocks will rebound. I do know that at some point people will start building houses again. Whether it's these companies, or others that replace them, this isn't a sector that is capable of staying down forever. I think these stocks can potentially have value in the future. Now is the time to buy if you can find the right one. I don't think any of these stocks distinguishes itself based on the numbers, but now might be a good time to scoop up an undervalued company if you're willing to hold it for the long term. I'm not going to pretend to be able to predict a bottom. Good luck if you decide to gamble on the homebuilders.

ACE Ltd. (ACE)

Couple of down days for the stock market. Oil hit almost $88/barrel, and inflation seems to be at the front of everyone's mind. On the bright side, maybe these down days can offer us some good buying opportunities.

I personally like ACE, a reinsurance company. Reinsurance companies are companies that insurance companies buy insurance with in order to cover their largest or riskiest positions. For instance, if you bought 100M (million) worth of life insurance from NY Life, they might turn around and get insurance on you, in case you die before you can pay enough big fat premiums to make it worth it for them. That's the business, here are my thoughts:

I should start by saying that Wall Street isn't crazy about this stock, and there are a lot of people out there that know a lot more than I do, so keep that in mind. Based on what I know and what I think, here's my analysis.

Price
ACE closed at $61.22, down $1.14 on the day. It bounced back and gained a few cents in after hours trading.

Cash and Debt
According to Yahoo! Finance, ACE has 3.54B in total cash and 2.46B in total debt. Insurance companies have to keep a large amount of cash on hand in order to pay out their claims when they guess wrong, so it's not unusual, but I have to say I like any company that has a billion dollars on hand, and plenty of money to pay its debts.

Dividend
ACE pays a dividend of 1.7%. Some people like extra growth - I like dividends. I like to feel like I am getting some guaranteed income with my capital appreciation.

Price to Book Value (PBV)
Benny Graham likes stocks with a price to book less than 1.5. ACE meets this threshold, coming in at 1.35.

PEG
ACE has a PEG of 0.63! That's incredibly low. I think it's so low that it implies that people on wall street know something we don't. The stock has a P/E ratio around 8. That's right, the stock is selling for just 8 times it's earnings. Someone buy this entire company. I don't know what's not to like about this company...

Competition
ACE has two main competitors, and both are bigger companies. One of the companies is private, and the publicly traded company is AIG. AIG is the giant in this market. This could be why the street doesn't like ACE more, maybe they think that AIG can push them out. I don't know.

AIG has a PEG of 0.8 (entire sector undervalued), has a PBV of 1.65 (just above Ben Graham's rule), and has about 176B in debt vs. about 92B in cash. Clearly, based on fundamentals, ACE kicks their butt. That being said, AIG has a much larger share of this market.

Negatives
The main negative may be that this stock is over owned by institutional investors. 89.4% of the companies shares are held by institutions. Some part of that is because the stock is part of the S&P 500. Anyway, if the big investment banking houses sour on this stock and start to unload it, it will move down, and quickly.

Conclusion
I think the stock is undervalued. I don't know what it should be valued at. I think part of the reason it's a little undervalued is because there are so many sexy stocks in sectors that are more fun. I don't think this is a good day trader, but if you want to get into one for quite a while, this could be a good one.

CO Rockies are in the WS - I hope they win it. Keep the championship with the NL. I bought Regina Spektor's newer cd. Good stuff.

Updates

Google

I sold my share of Google (GOOG) at the beginning of last week for $600.00. It closed on Friday for $637.39 and went to $638.00 in after hours trading. That shows how much I know. I was so eager to take some gains that I ignored the fact that Google is still an attractive stock. I sold it the same day analysts were busy upgrading it's 52 week price target to $750.00. Some analyst speculate that it could hit $900.00 in the next two years. Online advertising is the new newspaper business. The market isn't even close to being tapped out.

Here are a couple of things I don't like about Google long term. I admit that I'm grasping at straws here, but hear me out. Google is reportedly interested in branching out into the cell phone business. This worries me because it's risky. There are already companies out there that do this well. The word on the street is that they are extremely unimpressed with the software used in cell phones and think they can do better. Why not just focus on the online advertising business - it's growing growing growing...I don't think we're close to the peak of online advertising. My other concern is the other companies out there doing the exact same thing - why don't they wrestle some market share away from Google? Yahoo ads have more views than Google, they just aren't as profitable because they are a poorly run business - what happens when they clean up their act. Just some thoughts. I sold the stock way to soon, I know that. But part of me thinks Google will struggle at some point b/w now and $900.00. We'll see.

Mylan (MYL)

About two weeks ago, Mylan acquired Merck's generic drugs unit. In doing so, they suspended their dividend, and their PEG went from 0.77 to 1.44. That pissed me off and seemed to be a poor business decision. That being said, they are a long ways from their 52 week high and fairly close to their 52 week low. I'm staying in to see what happens. I wouldn't buy more until we see what direction they go in. Wall Street didn't seem to like this acquisition. We'll see if all those investment banks know more than the brass at Mylan.

Walt Jocketty

The Cardinals fired the best executive in franchise history. Good one dipshits. That's like selling Google for $600.00.