How a Hedge Fund Giant Sent Housing Stocks Lower

U.S. stock markets are having a slow start to the week, with the Dow Jones Industrial Average (DJINDICES: ^DJI  ) struggling to move past breakeven after an early morning drop.

The ISM nonmanufacturing index rose to 55.2 in April versus a reading of 53.1 a month earlier -- yet another sign that companies are feeling positive about the economy. A reading above 50 indicates expansion, although I still don't think we're in any kind of hot economy.

The big move today came from homebuilders, who were blasted at an influential conference for hedge funds.

Grundlach blasts homebuilders
The Ira Sohn Investment Conference is taking place today, and there some of the world's most well-known hedge fund managers unveil their latest investment idea. Jeffrey Gundlach of DoubleLine Capital said he was short homebuilders and thinks the worst is ahead for these stocks.  

KB Home (NYSE: KBH  ) and Toll Brothers (NYSE: TOL  ) were hard-hit once the presentation was made, falling 1.6% and 1.2%, respectively. Keep in mind that both companies are improving their operations, and they focus more on the high end of the housing market, where consumers are doing quite well.

KBH Revenue (TTM) Chart

KBH Revenue (TTM) data by YCharts.

Housing data hasn't been inspiring recently, as a number of factors have hit the industry. Mortgage rates are up since last summer, incomes aren't rising as fast as hoped, and new potential homebuyers are choosing to rent instead. Gundlach thinks those factors will continue and will keep homebuilder profits below expectations.

Building activity in the housing market has slowed recently.

Should you follow a hedge fund giant?
What does this mean for you if you own KB Home, Toll Brothers, or any of their competitors? I wouldn't advise anyone to follow a hedge fund's investments blindly, because you never know what the real story or position is behind their public statements. Take this thesis into consideration when making an investment thesis of your own, but don't act solely on what Gundlach is doing.

More importantly, hedge funds don't always beat the market, and Gundlach's call at last year's conference shows how wrong they can be. He made a short call on Chipotle Mexican Grill, and that stock happens to be up 38.5% in the past year. 

In the short term, traders will follow these hedge fund calls closely, but they've often been wrong over the long haul. Don't panic on the call or the move today, and just take it into consideration when making your own investment thesis. If you're right, it can be gratifying knowing you made the right call while a hedge fund giant didn't.

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8/29/2014 4:30 PM
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