Homebuilding Demolished! - Zacks Industry Rank Analysis - D.R. Horton (NYSE:DHI)

Industry Rank Analysis 11-18-10

The Construction industry has been demolished over the last few years, and it does not look like it will be rebuilt anytime soon. Housing starts are down about 75% from peak levels and are below year-ago levels, and a year ago things were pretty depressed.

Historically, residential investment is the locomotive that pulls the economy out of recessions. The fact that the locomotive is derailed is the primary reason this recovery has been so sluggish. Several of the firms related to homebuilding -- either the homebuilders or the suppliers of building materials -- are showing up as among the very worst, based on the Zacks Rank.

The Zacks industry classifications are very fine, with 256 different industries tracked. It is not particularly noteworthy if a single small industry shows up doing well -- a single firm with good news can propel a one or two firm industry to the top (or bottom) of the charts. What is interesting is when you see a cluster of similar industries at the top of the list. The same holds true for the bottom of the list.

Four “industries” in the overall Home Construction industry are showing up very poorly based on the Zacks Rank. The worst of the bunch are the cement makers, coming in 245th place (tie) out of the 256 industries tracked, a deterioration of 30 spots from last week. The average Zacks Rank for the seven firms in the group rose (rising is bad) to 3.71 from 3.29.

Right behind them are the miscellaneous building products in 244th place, slipping 3 spots from last week with an average score of 3.68 vs. 3.63 last week. The Heating and Air Conditioning industry is in 230th place, an improvement of one slot from last week with an average score of 3.50 (unchanged). Finally are the Homebuilders themselves, in 212th place, a deterioration of 28 spots from last week as the average score rose to 3.31 from 3.15.

The first table below shows the Homebuilding and related stocks that hold the dreaded Zacks #5 Rank (Strong Sell). The second table shows the Zacks #4 Ranked (Sell) firms. There is a range of market capitalizations to choose from between the two lists, although most are in the small- to mid-cap area. That might make it difficult to short these firms, and they might not have options available which would make the “buy a put” strategy impossible to implement, but that is not true for all of these firms.

In addition to the weak estimate momentum, the valuations on these firms are not particularly appealing (a NA indicates and expected loss for the period). There will be a time to own these names, but now is not the time.

Number 5 Ranked Firms

Company	Ticker	Market Cap ($ mil)	P/E Using Curr FY Est	P/E Using Next FY Est	% Change Curr FY Est - 4 wk	% Change Next FY Est - 4 wk	Current Price
Lafarge Sa-Adr	LFRGY	$17,187	16.67	11.45	-10.00%	-7.09%	$15.00
D R Horton Inc	DHI	$3,664	24.26	12.59	0.35%	0.00%	$11.51
Owens Corning	OC	$3,518	17.78	13.05	-4.60%	-4.52%	$27.42
Ameron Intl Cp	AMN	$631	22.45	16.85	0.00%	0.00%	$68.18
Drew Inds Inc	DW	$435	15.8	12.76	-6.37%	-4.33%	$19.75
Trex Company	TREX	$278	N/A	16.53	-109.80%	-21.46%	$18.00
China Adv Cons	CADC	$82	4.11	3.52	0.00%	0.00%	$4.68

Number 4 Ranked Firms

Company	Ticker	Market Cap ($ mil)	P/E Using Curr FY Est	P/E Using Next FY Est	% Change Curr FY Est - 4 wk	% Change Next FY Est - 4 wk	Current Price
Vulcan Matls Co	VMC	$5,215	N/A	N/A	-24.72%	-135.70%	$40.66
Martin Mrt-Matl	MLM	$3,922	43.84	31.87	-6.26%	-10.97%	$86.16
Lennox Intl Inc	LII	$2,195	16.59	14.05	-1.29%	-4.33%	$40.32
Eagle Materials	EXP	$1,176	44.12	34.85	-21.02%	-29.29%	$26.64
Ryland Grp Inc	RYL	$702	N/A	N/A	-46.15%	-307.69%	$15.91
Aaon Inc	AAON	$414	20.02	16.04	-5.30%	-0.64%	$25.02
Hovnanian Entrp	HOV	$308	N/A	N/A	0.00%	-80.61%	$3.96

In evaluating the Zacks Industry Ranks, you want to see two things: a good overall score (low, meaning more Zacks #1 and #2 Ranked stocks than #4 or #5 Ranked stocks) and some improvement the relative position from the prior week. It is also helpful to understand exactly what the Zacks Industry Rank is.

The Zacks Industry Rank is the un-weighted average of the individual Zacks ranks of the firms in that industry. It does not matter if the stock is the 800 lb gorilla that dominates the industry or some very small niche player in the industry -- they have the same influence on the industry rank.

Also, that means that the bigger the industry in terms of number of firms, the less influence any given company has on the industry rank. It also implies that small industries, with just two or three firms, should be the ones found at either the top or the bottom of the list. After all, if there are only two firms in the industry, it is relatively easy to get a Zacks rank of 2.00 (i.e. one with a Zacks Rank of #1 and the other with a #3). Right now, that industry rank would be tied for 6th place among the 255 industries tracked.

The same obviously goes for the bottom of the list as well. If there are 50 firms in the industry, and it ends up at one of the extremes, that means there has to be something pretty significant going on. Thus, I do not always focus on the very highest rated industries, but on the highest rated ones in which there are a large number of firms.

Click here for the Zacks Industry Rank List: http://www.zacks.com/zrank/zrank_inds.php

Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.

More about Zacks Strategic Investor >>

D R HORTON INC (DHI

): Free Stock Analysis Report

LAFARGE SA-ADR (LFRGY

): Free Stock Analysis Report

MARTIN MRT-MATL (MLM

): Free Stock Analysis Report

OWENS CORNING (OC

): Free Stock Analysis Report

VULCAN MATLS CO (VMC

): Free Stock Analysis Report

Zacks Investment Research