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Zacks Industry Rank Analysis Highlights: Capital One, Fannie Mae, Lehman Brothers, Pulte Homes and Toll Brothers

CHICAGO-(Business Wire)-September 4, 2008 - Zacks.com releases the latest Zacks Industry Rank. Stocks featured in this week’s analysis includes Capital One (NYSE: COF), Fannie Mae (NYSE: FNM), Lehman Brothers (NYSE: LEH), Pulte Homes (NYSE: PHM) and Toll Brothers (NYSE: TOL). To see the Zacks Industry Rank and the trend in earnings estimates revisions for more than 200 industry groups, visit http://at.zacks.com/?id=3154.

Zacks Industry Rank Analysis is written by Charles Rotblut, CFA, Senior Market Analyst for Zacks.com.

This week: Housing and Financial Problems To Last Into 2009

Key Points:

Mortgages are both harder to get and more expensive
2009 profit forecasts continue to be cut on homebuilders and financial companies

My Home Buying Experience

I've been trying to buy a house via a short-sale, and from what I'm hearing and reading, my experience has been typical of many other would-be buyers. It also reaffirms my belief that the housing slump will extend into next year.

Last April, my wife and I made a bid on a house that was selling for less than what was owed (hence the term "short sale"). The owners used 100% financing to purchase the house and have since been unable to keep up with the payments.

In a short sale situation, the lender(s) absorb the difference between the loan amount and the purchase price. Therefore, any purchase offer must be approved by them. The first lender approved our offer in June. The second lender asked us late last week to raise our price, just as the lawyers were proceeding to put the house to auction.

The risk the second lender is taking is that if an agreement is not reached on a sale price, the house will go to auction. Houses don't always sell at auction and even when they do, the sale price can be lower than the offer price previously presented to the bank. In other words, the second lender is taking a big risk by asking us to raise our offer in a market where home prices are declining.

We've countered with a price that is above our previous offer, but below the banks' asking price, which we think is too high. It could be a few weeks before we hear anything.

Now, multiply our situation by thousands of other would-be buyers and it's obvious why the housing slump continues.

Too Much Inventory

Most realtors don't like short sales because they take a long time to close and, at the same time, create competition for other houses. Short sales are certainly contributing to the glut of unsold homes, though the overall drop in the number of buyers is the biggest reason for the rising inventory.

How bad is the inventory problem? Well, last week the overly optimistic National Association of Realtors admitted that the inventory of homes continued to rise, reaching 11.2 months. In other words, if no other homes were put on the market, it would take nearly a year to sell all of the houses currently listed on the MLS.

More homes for sale means more pricing pressure. It's economics 101.

Therefore, it is not surprising to see brokerage analysts continue to cut their fiscal 2009 earnings estimates on the likes of Pulte Homes (NYSE: PHM) and Toll Brothers (NYSE: TOL). The average forecasts now call for PHM, TOL and other homebuilders to post another year of losses in 2009; previously, the brokerage analysts had actually projected profits.

No Money, No Buyers

Even for those who want to buy a house, credit is no longer easy to get. Many mortgage brokers are asking for credit scores of 720 or higher, far above the national average.

Interest rates have also risen. Bankrate.com currently shows the national average for 30-year fixed mortgages at 6.25%.

Even for those of us with good credit, interest rates can vary. Last week, I was given rates for a 30-year fixed mortgage that ranged between 6% and 6.875%. (My experience has been that rates in Illinois are typically higher than the national average.) All of the brokers I talked to blamed the ongoing problems with Fannie Mae (NYSE: FNM) for the higher rates. (One mortgage broker told me business was so bad, she decided to take the summer off.)

The problem is not just with GSEs. There is also the risk that the ongoing implosion within the financial sector will get worse. Consider the following:

The FDIC's list of problem banks grew to 117 in June, up from 90 during the first quarter.
The FDIC's insurance fund's reserve ratio dropped so low, 1.01%, that it is being forced to develop a plan for replenishing the safety net for depositors.
Bloomberg News estimates that banks and securities firms have cut more than 100,000 jobs this year.

And if that wasn't bad enough, many consumers are struggling with debt:

Nearly 1 million petitions for bankruptcy have been filed during the past 12 months; personal bankruptcies are up 28%.
Net charge-off rates for Capital One (NYSE: COF), and probably several other credit issuers, have been rising for several quarters.

Yet, in the background of this mess, some market observers have actually advised buying financials. These calls contradict the ongoing reductions in profit forecasts: financial companies account for nearly 25% of all negative earnings estimate revisions for 2009.

More importantly, if the problems in the financial sector weren't bad, than why is Lehman Brothers (NYSE: LEH) going hat-in-hand to the Korea Development Bank?

Trading the Financials and Homebuilders

I realize that some financial and homebuilding stocks have entered into trading ranges. Regardless of what the charts show, the risks of owning these companies continue to outweigh potential rewards.

At some point, the tide will turn. It hasn't yet, however, and investors would be prudent to be cognizant of this fact.

Despite this analysis, some of you will nonetheless choose to be contrarians and attempt to find a bottom in financial and homebuilding stocks. If so, I strongly suggest doing a lot of research and only buy those firms that are both fundamentally sound and trading at discounts to their historic earnings. Even then, dollar cost averaging may be advantageous since a recovery is unlikely to occur until next year, at the earliest.

The interactive Zacks Industry Rank List allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. See the list at http://at.zacks.com/?id=3208.

About Zacks Industry Rank and the Zacks Rank

Zacks Industry Rank is calculated by averaging the Zacks Rank for all covered companies within a given industry. The Zacks Rank is assigned to approximately 4400 stocks and ranges from #1 (“Strong Buy”) to #5 (“Strong Sell”). Both the Zacks Industry Rank and the Zacks Rank are quantitative indicators designed to cover periods of 1-3 months.

Since 1988, the Zacks Rank has proven that "Earnings estimate revisions are the most powerful force impacting stock prices." Since inception in 1988, #1 Rank stocks have generated an average annual return of +30%. During the 2000-2002 bear market, Zacks #1 Rank stocks gained +43.8%, while the S&P 500 tumbled -37.6%. Also note that the Zacks Rank system has just as many Strong Sell recommendations (Rank #5) as Strong Buy recommendations (Rank #1). Since 1988, Zacks Rank #5 stocks have underperformed the S&P 500 by 81% annually (+2% versus +11%). Thus, the Zacks Rank system allows investors to truly manage portfolio trading effectively.

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Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.

About Zacks

Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3:1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit From the Pros by going to http://at.zacks.com/?id=2565.

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