Sunday, November 16, 2008

The good news: The stocks of home builders were soaring. From Oct. 27 to Nov. 4, the sector shot up 26 percent. Value investors were circling, sniffing a possible bottom for the industry.

The bad news: These same stocks have taken double-digit leaps four times this year only to swoon afterward. This latest surge was the strongest since a 45 percent burst over two weeks in late January. The home builders crumbled after that, plummeting 63 percent from Feb. 1 to Oct. 20.

The hope: This time it's different.

The reality: A warning from Merrill Lynch. "We would caution investors who are attempting to bottom fish the home builders," Brian G. Belski, U.S. sector strategist for Merrill, wrote in a report last week.

The reasons: Home prices continue to deteriorate -- and not enough yet to strike a bottom. The sluggishness in building permits provides little encouragement. Home builders earnings have been hit hard. "While it appears that earnings growth has likely troughed, the group is not expected to return to profitability anytime soon," Belski predicted.

The latest: The stocks' prices are low but not low enough. "Despite the precipitous drop in the price of home builders over the past several years (down 85 percent from July 2005 peak) valuations for the group are not as inexpensive as such price performance might suggest," Belski wrote. Indeed, this time is not different. From Nov. 4 to Nov. 12, the home builders' group retreated 25 percent, just about as much as it had gained in the previous two weeks.

-- Steven E. Levingston