This Yellow Flag Could Be More Important Than the Market’s Sell-Off

Monday was a horrible day for the stock market, with just about the only positive thing to say being that major market benchmarks finished well above their worst levels of the day. The Nasdaq Composite (NASDAQINDEX: ^IXIC) saw the biggest percentage drop, but how the Dow Jones Industrial Average (DJINDICES: ^DJI) and the S&P 500 (SNPINDEX: ^GSPC) fared wasn’t all that much better.

Index

Percentage Change

Point Change

Dow

(1.78%)

(614)

S&P 500

(1.70%)

(75)

Nasdaq

(2.19%)

(330)

Data source: Yahoo! Finance.

As bad as the market’s action was on Monday, the bigger question is whether concern on Wall Street reflects sustained challenges that could result in a longer-term pullback for stocks. One hint that could provide some useful answers to that question came from the housing market, as a couple of key companies weighed in with their most up-to-date readings on the health of housing.

Below, we’ll look more closely at the latest news from Lennar (NYSE: LEN) and D.R. Horton (NYSE: DHI) to see whether investors really need to be paying more attention to housing.

Lennar sees solid growth — but still disappoints

Lennar’s stock fell roughly 3% in Monday’s regular trading session. The homebuilder proceeded to give up another 3% in after-hours trading following its release of its fiscal third-quarter financial report.

Image source: Getty Images.

The numbers from Lennar didn’t seem bad on their face. Revenue climbed 18% year over year to $6.9 billion. New orders came in at 16,277 homes, up 5% in unit terms, and representing a rise of 19% in terms of dollar value of those orders. Lennar delivered nearly 15,200 finished homes, up 10% from the same period last year. And thanks in large part to big mark-to-market gains on Lennar’s strategic investments, earnings more than doubled to $1.4 billion.

Yet investors seemed to focus on a couple of things. After adjusting for those extraordinary gains, adjusted earnings of $3.27 per share failed to meet expectations of those following the homebuilder.

Perhaps more importantly, Lennar Executive Chair Stuart Miller highlighted what he called “unprecedented supply chain challenges” that caused the homebuilder to miss its delivery guidance by about 600 homes. Moreover, Miller warned that those supply chain challenges would likely persist as far into the future as he can see.

Lennar has put itself in position to benefit from strong demand for homes, including a rich cash position, record-low leverage levels, and a strategic investment portfolio that has been exceedingly successful. The fact that that hasn’t been enough to satisfy investors is a testament to how much they want Lennar to keep topping their already high expectations.

D.R. Horton also warns

Part of the reason why Lennar shares fell earlier in the day before its earnings release came from D.R. Horton. The fellow homebuilder gave updated guidance early Monday that threw cold water on the bull thesis for the industry.

D.R. Horton said it now expects its fiscal fourth-quarter home closings to come in between 21,300 and 21,700 homes. That’s considerably below the previous range of 23,000 to 24,500 homes, but D.R. Horton blamed the shortfall on disruptions in its supply chains.

The company is experiencing shortages and delivery delays in key building materials, and it’s also dealing with a tight labor market that has made it more difficult to find qualified workers. D.R. Horton also cut its full-year closing range by more than 2,000 homes to a new range of 81,300 to 81,700.

Revenue will also be below previous guidance, with a new range of $7.7 billion to $7.9 billion falling well short of the previous guidance for $7.9 billion to $8.4 billion. That led to a corresponding cut to full-year revenue estimates as well, although D.R. Horton still sees revenue growth of 35% to 36% in fiscal 2021.

Expectations for homebuilders are high, and investors didn’t want to see any reductions in guidance. If other homebuilder stocks have similar things to say, it could take away what has been a key underpinning of the U.S. economy during the pandemic — and that would be a yellow flag for the market as a whole.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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