(This is an excerpt from an article I originally published on Seeking Alpha on January 19, 2016. Click here to read the entire piece.)
A year ago, KB Home (KBH) reported Q4 2014 earnings that greatly disappointed financial markets. The stock lost 16% in the immediate aftermath. The stock took 5 months to recover only to peak once again. KBH has traded downhill ever since. On January 7, 2016, KBH fell 15% in response to yet another disappointing round of earnings, this time for Q4 2015. The stock now trades at 3 1/2 year lows. Like the year before, KBH’s sell-off sent reverberations across the stocks of home builders.
Source: FreeStockCharts.com
There was a distinct contrast in this earnings call between the stubborn bullishness of management and the reality out in the “streets” of trading in the stock. On January 13, 2016, in apparent effort to try to change the sour mood on Wall Street, management put the company’s money where their mouths are by announcing an expansion of the existing buyback authorization:
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This announcement is a near 180 degree turn-around in attitude from KBH. {snip}
I am assuming that after further consideration, management understands that the stock is sitting in a bit of a “last stand” moment. {snip}
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Management completely avoided the recession question. Instead, it tried to reassure the audience that KBH stands on strong financial ground. {snip}
These recession fears present an intriguing buying opportunity for the stocks of home builders. {snip}
Ironically, I think KBH’s celebration of a series of record performances adds to recession-related anxieties. Recession fears tend to interpret such accomplishments as meaning performance cannot possibly get any better. {snip}
While KBH is in “show me” mode, the stock offers patient investors ready to bet against a recession a very attractive entry point. {snip}
Be careful out there!
Full disclosure: long KBH call options, long ITB shares and call options
(This is an excerpt from an article I originally published on Seeking Alpha on January 19, 2016. Click here to read the entire piece.)