Home-Building Analysts
Wax Prolific on the Boom
Wall Street analysts who cover the home-building industry have always been a prolific bunch. These days they are rivaling Tolstoy on a tear.
Ivy Zelman, an analyst at Credit Suisse First Boston who covers the stocks of D.R. Horton Inc., Centex Corp., Lennar Corp. and others, released 50 research reports last month -- including five in one day. Margaret Whelan at UBS spins out an average of two reports a day, while Banc of America Securities' Dan Oppenheim generates an average of 30 reports a month.
Why so verbose, and are all those pages helpful to investors?
Securities analysts following home builders traditionally research and write about a range of topics because the health of the industry is tied to many variables -- from the economy to immigration and demographics. But now that the fate of the housing market has become one of the most-closely watched stories in the U.S., analysts are following every twist in the data, from big picture to granular, trying to discern when the nation's possible housing bubble might burst.
For example, Ms. Zelman tracks 14 home builders but also produces lengthy reports on sales at Sherwin-Williams Co. paint stores, whose business may send signals about homeowners' tidying up to sell or fixing up new purchases.
"We're putting out as much information as possible," said Ms. Zelman, who heads a team of analysts who scrutinize dozens of economic indicators each week and survey more than 150 "channel checkers" -- people who collect data from furniture companies, building-supply chains and real-estate brokers to get an on-the-ground look at current conditions.
Ms. Zelman said she hasn't increased her output in the 13 years she has been covering the home builders, but she has been writing more "thought pieces." Her "Investors Gone Wild" report last month, which sought to quantify the effect of real-estate speculation, led to a conference call with more than 250 CSFB clients.
Building-industry executives say the heavy volume of research on their companies reflects a growing anxiety on Wall Street that analysts might miss a turning point in the market and end up vilified like Internet-stock analysts were for failing to call the technology-stock crash in 2000.
"Everybody is waiting for the shoe to drop, so none of these analysts want to be the last one out the door" said Rick Anderson, a spokesman for the Public Home Builders Council of America. "They feel as though they have to examine and microexamine every bit of information."
The pressure to catch turning points has led some analysts to make judgments about companies and stocks that run counter to the current state of affairs -- judgments that their clients may indeed thank them for down the road.
For instance, Carl Reichardt of Wachovia Securities LLC a few weeks ago downgraded the stock of Toll Brothers Inc., a luxury-home builder whose profits have more than doubled in each of the last two quarters. Mr. Reichardt shifted his view on the stock to "market perform" from "outperform" after surveying 150 sales mangers at home-building tracts in 18 markets and determining that the Washington market was headed for a soft patch. Toll Brothers has a number of large developments under construction in the Washington suburbs.
Still, it is hard to say how much research is too much. Mr. Anderson argues that the steady stream of commentary is possibly exacerbating volatility in home-builder stocks, which tend to be volatile anyway.
Edgar Wachenheim, chairman of Greenhaven Associates Inc., a Purchase, N.Y., money-management firm that owns stocks in many home builders, said he "never reads Wall Street research." The overall growth of the industry means more to him.
Sam Lieber, a manager of the Alpine U.S. Real Estate Equity Fund, also based in Purchase, said he probably takes a "quick look at most of the analysts' reports, but not all."
"I really don't care if someone says a company has earnings potential and their price targets are tertiary," said Mr. Lieber. "I try to set my own levels." Analysts counter that they go well beyond the basics of earnings forecasting -- and they feel they have to. They also parse a plethora of monthly government and industry data on home sales and housing construction, among other data.
Banc of America Securities' Mr. Oppenheim said analysts covering home builders have to keep up with myriad information sources: News can filter out from realtors or mortgage agents, for example. "I try to do more primary research, because in this sector, once a company starts talking about something, it's usually too late and the stock reacts," he said.
Last year, Mr. Oppenheim said, Pulte Homes Inc. slashed prices by an average of $70,000 a home in the Las Vegas area after realizing local pricing had gotten ahead of the market and sales slowed. Though that problem may have been specific to the Bloomfield Hills, Mich., company, it caused the stocks of many builders to fall. "If one had been doing more work on Vegas, one could have gotten a sense of what was going on ahead of time," Mr. Oppenheim said.
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