Retail Sales Up, Income Down: buy KBH and HOV?
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March 27, 2009

***Retail Sales

***Rally on Hold?

***Hovnanian Enterprises (HOV)

Fellow Investor, 

I'm fond of saying "never underestimate the American consumer." Retail sales for February came in with a 0.2% rise, even though income fell 0.2%. Stocks look ready to sell off, but it's not a response to retail sales. The indices have come a long way over the past two weeks, and it's time for a little profit-taking.  

I still believe that "buy the dips" is the appropriate strategy for the current rally. Of course, I'm talking about taking short- to medium-term positions. For the long-term investor, I suspect that you will get better entry points in the future. 

While I'm sure we've all enjoyed this rally, and there's a very good chance that we've seen the lows (6,440 for the Dow and 666 for the S&P 500), that doesn't mean stocks will continue to advance. We will see the indices test lower levels.  

And we shouldn't rule out the prospect of some of a "double-dip" during this recession. Given the pretty decent economic data we've seen recently, don't be surprised if economic data takes a turn for the worst before all is said and done.  

*****KB Homes (NYSE:KBH) reported better-than-expected earnings this morning. Actually I should say the homebuilders loss wasn't as bad as analysts feared. KB lost just $58 million or $0.75 a share in its first quarter, which (strangely) ended on Feb. 28.  

That's a lot better than KB's first quarter from 2008. The company managed to lose $268 million then. Of course, some of that loss is write-downs of unsold home values. It's possible that some of that loss is recovered, one day. KB Homes is in decent financial shape with over $1 billion in cash.  

I bring this up because Daily Profit recommended Hovnanian Enterprises (NYSE:HOV) earlier this week. On a valuation basis, Hovnanian is far cheaper than KB Homes. Hovnanian has a market cap of just $133 million on $2.6 billion in revenues. Clearly, that means there's more risk in Hovnanian. There's also more upside.  

The risk for Hovnanian is debt. Hovnanian's debt is about 3 times its cash. At KB Homes, that ratio is less than 2.  

I'm using $1.52 as the Daily Profit entry point for Hovnanian.   

If you're considering or have already added Hovnanian to your portfolio I'd love to hear from you. What do you think this stock's potential looks like? Any competitors you think are better? What's your take on homebuilders? Write to me at [email protected]  

*****The TradeMaster Daily Stock Alerts video conference "How to Swing Trade a Bear Market" aired Wednesday night. If you've got some down time this weekend and feel like getting TradeMaster technical analyst Jason Cimpl's views on the stock market, here's a LINK where you can access a replay of the video. 

That's it for today. Have a great weekend.

Best Regards,

Ian Wyatt
Daily Profit

Posted 03-27-2009 12:13 PM by Ian Wyatt
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