On April 28, builder PulteGroup Inc (PHM) reported its first-quarter loss, which was widened as the builder's total revenue tumbled by 21%, dragged by fewer closings and lower selling prices. Pulte is probably the biggest home builder in the US after it merged with Centex. If you know the financial conditions of this company and its unique business model, there is really no surprise to the very poor performance of it. Pulte bought significant amount of lands at the market peak a few years ago, for which it paid of course way too much. Given the current housing market situation, the lands it has can only sit there idle and have become a huge financial burden. Pulte has borrowed too much and it becomes more and more difficult to even simply meet the interest payment. More worrisome is the fact that both companies are based on the business model to develop cheap houses in poor areas, which include all kinds of slums. Think about it: where would it be more difficult to sell houses in the current market, good areas or in slums? Facing the very dire situation, what solution could the CEO think about? You got it, a merger with a company (Centex) also under the water! To me, it is almost like you ask two drunks to walk hand in hand on a straight line. Figure it out what will be the result!
I'm short PHM. I think it is especially a good time to do so now. I'm not sure if PHM can survive long and less so in a house market that has officially entered the double-dip phase. In addition, the overall market is facing a D-day, the end of QE2 in less than 2 months. A big sell-off may happen anytime. A struggling stock will be hit more in a depressed market. You may short sell PHM stock shares directly at the current price around $8 or you can buy its put options. I like it better by short selling its call options at the strike price of $10. This way I have more room to be right, i.e. PHM can increase up to $10, by which I can still make money.
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