I know it's only January, but I'm in the mood for a little spring cleaning.
In this weekly column, I sift through the garage full of stocks, crack open the dustiest of boxes, and toss out the most dated of equities. Naturally, it wouldn't be a worthy round of spring cleaning if I didn't make the most of the empty space. So while I might diss a company, I'll come right back with three stocks that I think will be better portfolio replacements.
Who gets tossed out this week? Come on down, Lennar
United we strand
Homebuilders have been racing back into investors' fancy. Lennar's stock has more than quadrupled since bottoming out at $3.42 in November 2008. There's been no letup in 2010. Lennar shares soared by 26% through the first seven trading days of the year.
Some of that optimism is warranted. Home prices are showing signs of bottoming out. Dirt-cheap mortgage rates are making it cheaper to own homes. Losses have also been narrowing across the board.
However, that last point is also a bone of contention. Simply losing less money doesn't signal a turnaround. Real estate developers have a long way to go before they're making money again -- and even then, the insane margin-padding markups of the past will be toast for a lot longer than that.
Lennar turned heads last week when it posted its first quarterly profit in more than two years. It was a bogus shade of black ink, though. Lennar's fourth-quarter earnings of $0.19 a share included a huge accounting benefit. Back out all of the one-time charges, and Lennar delivered a deficit of $0.26 a share. Rival KB Home
The rest of Lennar's report isn't very inspirational. Revenue fell by 29%. Deliveries slipped by 23%. There was a 3% uptick in new home orders, but the 20% cancellation rate is still problematic.
Analysts are still excited. This is the first time in more than a year that Lennar has delivered better-than-expected results. They also see the company returning to profitability in 2011, but that's sucker's bet. There is still a glut of existing homes out there, as property-flipping speculators pare down their excess inventories and foreclosed homes sit vacant. When the economy bounces back, there won't be a need for a plethora of new cookie-cutter homes further out in the suburbs than Lennar's previous development.
The model is also suspect. The costs of building a new home haven't plummeted along with what a new homeowner is willing to pay -- and a sobered-up mortgage broker is willing to lend -- for said house.
Lennar will survive. It has a relatively healthy balance sheet, and the lull will shake out the weaker players. However, survival isn't enough. Given its share-price gains over the past year, Lennar has to thrive as well.
That feast is several years away. Your investing dollars aren't that patient.
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting tossed. Let's go over three new fill-ins.
China Real Estate Information
(NASDAQ:CRIC): Leading Chinese real estate agency E-House (NYSE:EJ)teamed up with SINA's (NASDAQ:SINA)online real estate businesses to create a well-rounded provider of real estate information, consulting, advertising, and online services across the world's most populous nation. China Real Estate Info is trading for 22 times this year's projected profit. That may not seem cheap, but keep in mind that analysts see earnings and revenue growing by 57% and 64%, respectively, this year. Investing in China is risky at the moment, but the attractive earnings multiple relative to its growth rate is hard to ignore.
(NYSE:LL): As the leading specialty retailer dedicated to hardwood flooring, Lumber Liquidators has more going for it than you may think. At a time when home-improvement chains are sputtering, home owners are heading out to the 186-unit chain to upgrade their floors. Its latest quarter is a beauty. Net sales climbed by almost 18%, powered by a 5.5% gain in comps and aggressive expansion in a highly fragmented sector. Lumber Liquidators expects to earn between $0.95 and $0.97 a share in its recently concluded 2009 year, well ahead of the $0.75 it earned a year earlier, before charges. It's one of the few stateside residential housing plays that make sense right now.
(NASDAQ:LOOP): The leading online marketplace for commercial real estate may appear to be as doomed as a residential developer, but let's debunk the myth of a commercial real estate bubble. Unlike the residential bubble -- created by unsustainable price increases and greedy mortgage brokers -- commercial real estate is ultimately accountable to its tenants. A company doesn't move into an office (or a retailer into a strip center) unless it can cover the expenses. There was admittedly some degree of froth, but not enough that a good economic recovery won't fix it. LoopNet's fate also rests on interest in both new and existing properties. Along the way, LoopNet has taken a hit, but it remains consistently profitable. Browsers are coming back, too. LoopNet served up 44.1 million profile views during last year's third quarter, a 26% sequential improvement.
Sorry, Lennar. You don't look like home sweet home just yet.
Longtime Fool contributor Rick Munarriz always takes out the garbage. He owns no shares in any of the stocks in this column and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.