When is it a Trend? When is it Hype?

Tyler Crowe (0:02)

Is the investing trend your friend? Motley Fool Hidden Gems Investing starts now.

I'm your host, Tyler Crowe, and today I'm joined by long-time pool contributors, Matt Frankel and Jon Quast. Guys, I think it's fair, we talk about trends a lot in investing, but there is a difference between like hype cycles and durable business trends and stuff like that. We're going to dig into that a little bit, but we're actually going to start on the opposite end of a hype cycle and talk about an apathy cycle, and that's in housing kind of specifically. We're in the off season for earnings, but there's always those few off cycle companies we're following. And Lennar, it's the largest home builder in the United States, so I think that sort of qualifies here. The market kind of shrugged at its results, but here's what stood out to me, guys, as a home builder. Its stock right now trades for less than book value. So to use housing terms, the market's implying the company is basically under water. It's worth more liquidated than trying to operate it as a business anymore. So Matt, you like to dig into home builders' numbers, probably more so than anyone else in the show.

We could fight over it, but I'll give you the title here. Was this really that bad? I know we just had a rate hike and everyone's scared of housing, but were the numbers really that bad?

Matt Frankel (1:26)

Well, yes and no. So Lennar missed on both earnings and revenue and cut its guidance, and the CEO gave pretty terrible comments. The stock is down by...

Tyler Crowe (1:34)

Oh, that sounds like a great start.

Matt Frankel (1:36)

Right. The stock is down by 2%.

Can you imagine what an AI infrastructure stock would be if it had that four pack of bad news?

But Lennar, the numbers were terrible. And it's not just that they missed expectations. It's that they're having to incentivize buyers. This could be good news if you're in the market for a house. Incentives for Lennar's closed homes have been about 12% of the selling price. That means if you're buying a $400,000 home, Lennar is giving you $50,000 or so worth of incentives. That's pretty remarkable. I mean, construction costs are down a little bit. There's some bright spots here. The company's been buying back stock as are a lot of other home builders. But I mean, it feels like Lennar and some of these other home builders are essentially running clearance sales on their products for the past three to four years. And now with the new Fed hike, there's really no end in sight. It's a pretty good time to have money to buy a home right now.

Jon Quast (2:33)

Yeah. I mean, there are some headwinds in the home space, aren't there, Matt? And interest rates are playing a big part of that. The president, of course, saying that he would love them 1% or less. The reality is that ain't happening. He has his guy in there.

They were not able to bring rates down. In fact, they were looking at the debt and saying we actually need to raise rates. I mean, I feel like Wesley in the pit of despair in The Princess Bride. I mean, I would like rates to be lower. A lot of people would like rates lower and for a variety of reasons. The reality is it's not happening right now and that is the space that we find ourselves right now.

Tyler Crowe (3:09)

Matt, we've been talking about this and Jon, we've had this conversation about housing for a while. It's lousy. We've all been waiting this long time. When interest rate cuts, interest rate cuts, we're now looking at hikes again. This seems relatively similar to the story in 2022, 2023 I'm not going to say we're going to go like these jumbo hikes that we saw during that time, but we're back into a credit tightening cycle. This doesn't pretend well for the housing market. It's not great.

We have been talking about this for a while.

It's hard to see over the next couple of years that changing. There are lots of companies that will likely be lousy investments for a while in this industry, but they're cheap. Like I was just saying, Lennar is trading for less than its book value. Maybe they're good investments for like five to 10 years, but I think a lot of people will be like, well, I don't know if I'd necessarily want to wait five years to wait for a payoff that may or may not come. Looking at it and being like, it's okay. There's maybe something worth getting at here. What are some companies in housing-related stocks that actually have near-term catalysts?