How a Hedge Fund Giant Sent Housing Stocks Lower

A short call on housing by a hedge fund manager has sent the industry's stocks lower today.

May 5, 2014 at 3:30PM

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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Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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