Worst Stock for 2009: Hovnanian Enterprises

Which 10 companies should you keep out of your portfolio? Find out in our special series on the Worst Stocks for 2009.

From the outside, it's the epitome of the American Dream. On the inside, however, it's a house of horrors. I'm talking about homebuilder Hovnanian Enterprises (NYSE: HOV  ) , builder to the country, with communities under construction all over the nation. It's also my selection for the Worst Stock of 2009.

Back to the future
You can argue that Hovnanian is the perfect poster child for housing's malaise. In mid-2005, the stock peaked at $72 a share. Today:

  • The stock today trades at just 1/40th of that price, at about $1.80.
  • Mortgage rates remain low.
  • The Federal Reserve recently slashed key interest rates to record lows, between zero and 0.25%.
  • December witnessed the largest jump in home sales in nearly seven years, but apparently not of new homes.

Back in October, my Foolish colleague David Lee Smith said that if housing were to recover, Toll Brothers (NYSE: TOL  ) might be the company to lead the way out. It had the best cash-to-debt position of any of the builders. Even though Hovnanian has been improving its cash position from a low of $1 million on Jan. 31, 2007, it is still on shaky ground. Take a look:

Builder

Cash

Debt

Equity

Hovnanian

$838

$2,600

$330

Beazer Homes

$584

$1,750

$375

Centex (NYSE: CTX  )

$1,260

$3,100

$1,970

KB Homes (NYSE: KBH  )

$1,250

$1,940

$861

Meritage Homes (NYSE: MTH  )

$119

$629

$605

Palm Harbor Homes

$30

$276

$121

Pulte Homes (NYSE: PHM  )

$1,170

$3,500

$3,180

Ryland Group (NYSE: RYL  )

$345

$784

$784

Toll Brothers

$1,630

$2,140

$3,240

Source: Capital IQ, a division of Standard & Poor's. All amounts in millions.

And it will get worse, because no one seems to be buying new homes anymore.

If I had a hammer ...
With its fiscal fourth quarter, which ended on Oct. 31, Hovnanian reported its ninth consecutive quarter of net losses and its seventh straight quarter of operating losses -- and that doesn't include the asset writedowns that Hovnanian and all of the other builders have been taking over the past couple of years. Further, net contracts -- new contracts minus cancellations -- dropped by more than 54%, and their average prices fell by 9.3% in the quarter, compared with a year ago.

The Commerce Department says new-home construction fell by 15.5% in December, much worse than what economists had forecast. Coupled with a greater than 10% decline in building permits -- considered a leading indicator of future housing activity -- housing's foundation is shakier than it looks.

Some builders want to jump-start home sales with enticing mortgage terms. Toll Brothers is offering 3.99% financing on 30-year mortgages, with no points. But the terms are pretty stiff. First, as the car dealers like to say, you need to be "well qualified." You need a credit score of 720, you have to cough up a 20% down payment, and you can't borrow more than $417,000. Oh, and you'll probably need to sell that home you already own. How's that working out for you?

In today's market, it's just not happening. Despite a healthier financial position than at the start of 2007, Hovnanian is caught in a crisis only partially of its own making. The Census Bureau reports that square footage is shrinking, and the National Association of Home Builders says 88% of builders surveyed this month are planning to build smaller homes. Both situations translate into lower home prices. Just because some stocks have already incinerated millions of dollars in shareholder value, that doesn't mean you still won't be throwing away your savings by buying in here.

... I'd nail the coffin shut
This takes just three nails.

  • Ben Bernanke, in a speech a little more than a month ago, said that 4.5% of first-lien mortgages are more than 90 days past due or in foreclosure and that 10% of near-prime and 20% of subprime mortgages are delinquent.
  • The unemployment rate rose above 7% in December, and rising joblessness will probably lead to even more foreclosures.
  • The next housing time bomb is set to go off later this year, when the resetting of option ARM interest rates kicks in.

It's not a question of who wants to buy a house, but who is able to. Nor is it a question of "Why buy this stock?" but rather "Why are they still building houses?" If you look at it that way, and given the data, the case for making Hovnanian the worst stock for 2009 is easy.

If you agree that Hovnanian is the Worst Stock for 2009, leave a comment below telling us that you would put a thumbs-down on the company. Of course, if you disagree, then cast your vote below, saying that the company will outperform.

In the meantime, peer through housing's windows with these Foolish articles:

Meritage Homes is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Rich Duprey has no financial position in any of the stocks mentioned in this article. You can see his holdings. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 28, 2009, at 5:14 PM, CharlesOfSquan wrote:

    Great article. I'm going to give back the 12% I made today on the stock.

  • Report this Comment On January 30, 2009, at 1:49 PM, cary123456 wrote:

    Rich,

    You are 1 of the reasons that the new home market is not performing like it should. People like you think they know everything about the market, when in reality you know absolutely nothing about the new home market. You get everyone worried about the market, then instead of going out and buying new or resale homes, they sit back all worried that the sky is falling. I sell new homes, and this month we have sold more new homes than any month in the last 5 years. Would it kill you to say something positive about the market, or do you only get paid if you print "The sky is falling" type articles. With all of the layoffs across the county, I think the best layoff would be your postion. This county would be better off without you writing negative articles.

  • Report this Comment On January 30, 2009, at 3:19 PM, PC0808 wrote:

    Great article Rich,

    Those of us in the new home arena need to pull our heads out of the sand. Ara spent much of the beginning of the housing downturn blaming the media for the crisis. It's like blaming the X-ray for the broken bone. It made no sense and made K Hovnanian look desperate. Then they were the first to go to the Fire sale with the "Deal of the Century" that turned out to be a colossal failure. The leadership at K Hovnanian has been unimaginative and uninspired for years now. No one should invest in this company until there is a change in market conditions and a change in leadership.

  • Report this Comment On February 01, 2009, at 9:36 AM, Builder360 wrote:

    Try not to offend some readers with the truth Rich...imagine you are 1 of the reasons the new home market is not performing and traffic is slow at the new home models. I think you're also responsible for the melting glacial caps.

    Let me mention something positive so you don't get "laid off"...if your looking for a new house it's a great time to buy because the big builders have reduced their typical profit margin targets to try and sell new homes to generate cash flow just to get them through this tough cycle.

    Regarding Khov...you may be right but Ara will do everything he can to keep the family business alive.

    Most people would!!!!!

  • Report this Comment On March 04, 2009, at 12:34 AM, truesilvermoon22 wrote:

    I couldn't agree more on the complete lack of fore thought and leadership of this turkey. The media didn't force Khov to keep building bix box homes. It's amazing that they are still alive as of today!

  • Report this Comment On April 08, 2009, at 11:01 AM, truesilvermoon22 wrote:

    It's the CEO's like Ara that have put these mega companies where they are today with their own giant paychecks and poor management. It's not the fault of Rich here!

  • Report this Comment On August 07, 2009, at 10:55 AM, jamf92 wrote:

    Hilarious! Complain about and point to the article author as the cause of the industry doing bad and that people are not buying homes. Is Builder360 and cary part of the Hovnanian family or employed by them? It's not a hard article to write since Rich is just basing his judgement on "facts"...facts that KHov created for themselves.

    And Builder360, you say "Ara will do everything he can to keep the family business alive". Would that include getting rid of his corporate jet, his country club memberships and the multiple exotic cars (Aston Martins, etc.) that he flaunts around at his office? I doubt it. So no he will not do "everything" he can to keep it alive. He will do what he can as long as it does not cut into his lavish lifestyle.

    Kudos to Rich for being brutally honest on an organization that deserves no better than what your article stated.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 819162, ~/Articles/ArticleHandler.aspx, 10/25/2014 1:46:28 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement