Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets. It is Tuesday, March 25. Today’s Stocks On The Contrarian Radar©️ segment features KBH 0.00%↑ and starts at the bottom of this page.
State of Play
Stocks put in a big rally yesterday on news of softer tariffs and better-than-anticipated flash PMIs. Tesla (TSLA 0.00%↑) was one of the biggest winners on the day. Tech stocks rallied across the board.
As we eye our board of indicators for signs of direction at 0640, there is not an awful lot to go by:
Stock index futures are unchanged with the exception of small caps. These are down just a bit. The Russell 2000 is off 0.4%;
Commodities continue their ascent. Copper is up 1%. WTI crude oil up 0.5% to trade around $69.50/barrel;
Cryptos are flat. Bitcoin is unchanged hovering just over $87,000;
Bonds continue to drop. The 10-year yield is up 3 basis points to 4.58% (yields move inversely to prices).
Today’s Known Events
A bunch of housing data:
Building permits for February are out at 0800 ET. Economists who were surveyed expect 1.456 million new permits, down a bit from the 1.47 million recorded last month;
Case-Shiller home prices are out at 0900 ET. The 20-city average is expected to rise by 4.6% year-over-year, effectively unchanged from the 4.5% recorded last month;
New home sales are out at 1000 ET. The expectation here is for 682,000 transactions, which is up from the 657k recorded last month.
CB Consumer Confidence is out at 1000 ET as well. A reading of 94.2 is anticipated, which is well below the 98.3 recorded previously. Friendly reminder that these consumer surveys — like just about everything else, it seems — is divided along political lines these days. If you support the party in power you will generally be optimistic. If you don’t, you won’t.
New York Fed President John Williams speaks at a regional and community banking conference hosted by his office. It appears this will be broadcast live. Williams laid his views out pretty succinctly in a speech last week.
The Bottom Line
Nice rally yesterday. There was some additional good news on the tariff front overnight, with India saying it will cut some levies on US imports. The question is how the market will react if/when fresh tariffs are announced/threatened by the Trump administration? Hard to see how it will escape the tariffs on/tariffs off cycle, at least until we get some fresh data.
That could come today from the housing market. We had some disappointing earnings from KB Home (KBH 0.00%↑) last night and one can’t help but wonder if a miss from any of today’s housing data will lead to selling in the broader stock market. If so, bonds might present an opportunity seeing how much they have dropped over the last couple of days.
If today’s housing data doesn’t deliver a catalyst (good or bad) we will almost certainly be in a holding pattern until Friday’s PCE Deflator for the simple reason that there is very little in terms of known events until then. Or maybe the market will find something else to obsess about?
Stocks On The Contrarian Radar©️
As mentioned, KB Home (KBH 0.00%↑) dropped overnight after reporting disappointing earnings. The stock now trades at fresh 52-week lows if the overnight drop is factored in (not reflected in the below chart):
As we reported in this space last week, it’s been a rough time for homebuilder stocks. The iShares US Home Construction ETF (ITB 0.00%↑) also trades at 52-week lows and has actually performed worse than KBH. Just for fun, we added the stocks of two major homebuilders, NVR (NVR 0.00%↑) and Lennar (LEN 0.00%↑) to the chart below:
As you can see, KBH trades pretty much in lockstep with ITB. NVR does too, but has outperformed a bit. LEN is the clear laggard.
Lennar was the topic of last week’s discussion. Turning back to KB Homes, we find a pretty compelling valuation. KBH trades at:
7x forward earnings
0.6x forward sales
6x forward cash flows
For sake of comparison, LEN’s version of these multiples are 11/0.9/14.
KBH’s balance sheet looks pretty clean, with $1.7 billion of debt versus a $4.3 billion market cap and $600 million in cash.
The problem was yesterday’s earnings. These missed estimates across the board, with revenues declining on a year-over-year basis. Sales dropped too, offset a bit by higher costs. Inventories are up. Margins are down. Cancellations were up last quarter too. Apparently KBH is more exposed to first-time buyers than Lennar and apparently this part of the market is starting to retrench.
None of that is good. Not for KBH, probably not for LEN, and not for the economy either. Real estate is a major driver of growth in the US but its biggest impact may be psychological: If fewer Americans are buying homes, and existing homeowners aren’t seeing prices appreciate as much as they’d like (or at all), it creates a very pessimistic backdrop.
Prices do appear to have reaccelerated however, at least nationally. Today’s Case-Shiller report should supply some new data on that front. And lower interest rates, should they happen, will lower mortgage costs. Assuming Americans stay employed, that may be enough to keep the housing market from rolling over.
That would make KBH cheap. Its balance sheet does keep the doom at bay a little bit. But the whole business is so cyclical and right now the cycle seems long in the tooth.
The Verdict
It’s too hard to justify the risks of buying a homebuilder right now. More generally, KBH’s earnings should probably be heeded as a warning. So The Contrarian is going to stay away from this cyclical monster and more generally exercise greater caution when taking on risk allocations.
Housekeeping
Obviously this is not investment advice (duh). Do your own research, make your own decisions.
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