For the third time in five quarters, homebuilder Lennar Corp. (LEN) missed its earnings and told analysts it’s “recalibrating” its operations. Of course, the contrarian take may be that Lennar’s troubles are a sign of capitulation and that things may improve from here, advises Joe Duarte, editor of Joe’s Weekender Portfolio.
Why would the number two homebuilder in the US “recalibrate” its business model when mortgage rates are at the low end of the cycle? Sure, the housing market is down, yet other homebuilders are still selling homes and keeping their margins at reasonable levels. So maybe Lennar has a problem with its management team that needs to be addressed. I would not be surprised to see changes at or near the top at LEN soon.
As the price chart shows, the stock took a beating as LEN missed on both its top and bottom lines and the market was not amused. Margins shrank (to a Wall Street-unhappiness-triggering 17.5%) and the company’s future guidance, flattish at best, also left a lot to be desired.
But here’s the kicker: Anyone who’s been following my musings on the housing market is familiar with the house I’ve been talking about for the past year. You know, the nice house in the nice neighborhood that no one wants?
Guess what? It’s pending for sale – after a $35,000 price reduction and mortgage rates crashing. Sure, it’s one house in a tough market. Yet, if it actually sells, it tells us a lot about the market – lower prices and lower interest rates will increase sales.
That said, what still matters the most in this market is the status of liquidity. So, here's the trading plan:
- Monitor the news, but don’t let it guide how you trade. Watch the price charts for a response and act according to your trading plan and risk profile.
- Follow the money and track liquidity.
- Trade each stock individually, one day at a time.
- Don’t wait to buy when the “Buy” signal is issued and keep a close eye on sell stops.
- If the sell stop gets hit, it’s time to sell. Period.
