The other day on one of the shows someone mentioned that the homebuilders were cheap because they were trading at single digit multiples.The chart is from Bloomberg. Bloomberg has a PE function where you can enter the ticker symbol and get a chart of the PE ratio. This is such a useful tool that I am surprised it does not exist elsewhere on the Internet (someone please correct me if it is somewhere).
I am not a fan of using PE ratios as a predictive tool for the overall market. I do think that PE ratios are useful for trying to value a stock and compare a stock to similar companies.
That the homebuilders are cheap with single digit PEs may not really hold water. Homebuilders always trade a big discount to the market PE ratio-wise, at least it seems like the discount is always huge.
I picked DR Horton (DHI) at random and the concept is evident with this one. In the last seven and a half years, about 90 months, DHI's PE has never gone above 12 and appears to have only been above ten for about six months (my eyeball assessment).
Single digit PE ratios are not new for the homebuilders. In my opinion, calling them a buy because they have single digit PEs paints an incomplete picture. DHI, with its current PE ratio of four might really be cheap though.
I have written before about missing the multi year run that housing stocks have had. I have never understood the supply and demand equation for new homes and I still don't. Every investor has blind spots. Even Warren Buffet and Peter Lynch, who both say they don't really understand tech stocks, have blind spots
There is no shame in avoiding those parts of the market that you do not understand, assuming you know what you don't know. Diversified portfolios can be constructed and success can be had even if you do have a few blind spots. If you struggle to understand most of the market you might want to reassess whether you need help or not.
8 comments:
Roger,
Could you please provide a link to get those charts from Bloomberg, as I can't find the P/E charts you are speaking of. I frequent the site but only see regular price charts, news, and quotes. Thanks in advance.
me
it is from a Bloomberg terminal not the website
Trailing PE trends are probably most useful for individual companies or sectors because they provide some fundamental evidence of how expensive a stock is relative to its own or sector's history. IIRC home builders, perhaps not surprisingly, tend to have PE's comparable to lending institutions -- rarely higher than low double digits.
Forward PE's can be useful too but since these are estimates they must be used with great care. Cramer (yes, that Cramer) makes one rather counterintuitive strategic recommendation that consists of buying cyclicals when their PE ratios are highest. According to him, the wide P/Es reflect the frantic effort of analysts to lower earnings estimates but that generally happens once the stocks have stopped going down.
Think I'd need to see some confirmation of that but no hope of playing that game now (assuming anyone would want to) in the residential construction sector given the current low PE's of many home builders but it might be interesting to see if that plays out as expected; i.e., do stocks in this sector (and related sectors) tend to do better _after_ their forward PE's spike?
The online WSJ (subscription required) in its stock research function, under dynamic charting, provides an option to chart P/E over time for a stock.
JD
JD, thanks I will check it out.
RW, great question. Truth is I don't really follow the group, I really don't have an answer.
Haha, well for those of us who don't spend $1450/month for a B-Terminal or the $79/year for WSJ, there is another option...
You can get the P/E chart from www.bigcharts.com
Enter a ticker symbol or company name into the data box near the top of the screen, and then click the middle button labeled “Interactive Charting.”
When you see the charting screen, look for the timeframe dropdown window on the left and select “All Data”. Then select P/E Ratio in the third “Lower Indicator” dropdown windows.
And it will get the P/E chart (plus it's on the same screen as the price chart - NICE!).
It seems to me that if the P/E ratio for the homebuilders is going to get into its historical line, it is the "E" portion that is going to do it. Cut the E in half or in a quarter and voila! A more proper P/E. With inventories like they are I don't see how homebuilders can possibly see earnings even hold steady. They can cut staff to stay profitable, but the EPS should go microscopic. I am a residential real estate bear. Can you tell?
Hey thanks for the tip about the bigcharts.com PE charts, that's really helpful. -Mark
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