Bookkeeping: Replacing Lennar (LEN) with Meritage Homes (MTH)

While I seem to be one of the last souls who actually still reviews earnings reports in this "student body left" trading environment, and I am not sure how much of a difference it makes anymore to discern between individual stocks in the same sector as they mostly all move together - I still pretend that it matters and hence I still like relative values! I see an opportunity to upgrade my 1 homebuilder stock exposure. I am going to replace Lennar (LEN) which we've owned not for any specific reason to Lennar, but only as a proxy for "the consumer is back" & "green shoots in housing" trade. In its place I am going to put in a smaller regional builder called Meritage Homes (MTH); Meritage is based on Arizona but has a huge concentration in Texas. While many of my comments on housing are of a national scope there are of course differences in regional economies - i.e. the northern plain states are actually doing relatively well during this downturn as is Texas, all things being relative. The cost of homes never got completely out of whack in Texas, so most of the weakness go forward will simply be from a rotten economy or as we all now call it "green shoot recovery".

Our homebuilding and marketing activities are conducted under the names Meritage Homes, Monterey Homes and Legacy Homes. We have operations in three regions: West, Central and East, which are comprised of 12 metropolitan areas in six states. These three regions are our principal business segments. At March 31, 2008, we had 215 actively selling communities in Houston, Dallas/Ft. Worth, Austin, San Antonio, Phoenix/Scottsdale, Tucson, Las Vegas, Denver, Orlando, and the East Bay/Central Valley and Inland Empire of California.

Obviously some of those areas, especially in the Arizona and California regions have a long time to recover (foreclosure sales will be dominating for the interim) but 65% of exposure is Texas. Frankly if Ben Bernanke "succeeds" (by his definition) of pushing us into massive stagflation with his paper printing - the oil and natural gas markets should be enjoying excellent times in the years ahead which will help Texas and Oklahoma greatly.... while destroying most US consumers.

So for today, I have about a 1.3% exposure in Lennar (LEN) which I am going to "flip out" of and simply replace with Meritage Homes (MTH). Meritage has the superior chart to both Lennar and the homebuilders index as I've been waiting for a pullback to do this replacement. The company jumped off a (relatively speaking) ok earnings report in late April. The stock is back to the 20 day moving average of $19, stock gods willing we can add near $16 now that the wizards of Oz have pushed this market high enough so companies can offload stock onto the public at much higher prices.

• Meritage Homes Corp's (MTH.N)
  first-quarter net loss narrowed as charges to write down the
  value of land declined. 

• The homebuilder reported a net loss of $18.4 million, or 60
  cents per share, compared with a year-ago loss of $45.3 million
  million, or $1.72 per share.

• The results included $10 million in real estate valuation
  charges, 83 percent lower than the $60 million taken in the
  year-ago quarter.

• Home-closing revenue fell 38 percent to $231 million.

• Meritage has capitalized on its outsized exposure to the relatively
  

• healthy Texas market to endure the U.S. housing
  market slump, now on the cusp of its third year.

• About 65 percent of Meritage's active communities are concentrated

•  in Texas, according to data from analyst Carl
  Reichardt of Wachovia Capital Markets LLC.

• As in most other major housing markets, unemployment is
  putting pressure on new home sales and prices in Texas. But in
  part because the state's job market is still comparatively
  strong, median home prices are nonetheless holding up better
  than the national average

• The Scottsdale, Arizona-based builder also said it had begun
  to acquire deeply discounted land where it had seen an increase
  in entry-level homebuyer activity.

Again, as always I want to be clear - I don't believe in these fairy tales of imminent housing (or otherwise) recoveries despite the government's attempts to now literally turn every renter with FICO score of 620 or above into a home owner. I also wait with baited breath for how central command will handle long term interest rates - the farther long term yields go up, the more the consumer is cooked and the "house ATM/refinance" game loses steam. I am surprised Uncle Ben has allowed rates to get even this high and my assumption is a new round of B52 bombing on long term rates will commence perhaps at a surprise juncture in between meetings. Because if we go to a world with 5.50%+ 30 year mortgages (which would still be historically extremely low) and $75+ oil, this economy is toast. Our drug are low rates, easy money, and lower prices... hence I expect SuperBen to swoop in if the "free markets" start ruining the central planning committee's master plans.

Long Meritage Homes in fund; no personal position