Retail Sales Up, Income Down: buy KB and HOV?

I’m fond of saying "never underestimate the American consumer." Retail sales for February came in with a 0.2% rise, even though income fell 0.2%. Stocks look ready to sell off, but it’s not a response to retail sales. The indices have come a long way over the past two weeks, and it’s time for a little profit-taking.  

I still believe that "buy the dips" is the appropriate strategy for the current rally. Of course, I’m talking about taking short- to medium-term positions. For the long-term investor, I suspect that you will get better entry points in the future. 

While I’m sure we’ve all enjoyed this rally, and there’s a very good chance that we’ve seen the lows (6,440 for the Dow and 666 for the S&P 500), that doesn’t mean stocks will continue to advance. We will see the indices test lower levels.  

And we shouldn’t rule out the prospect of some of a "double-dip" during this recession. Given the pretty decent economic data we’ve seen recently, don’t be surprised if economic data takes a turn for the worst before all is said and done.  

*****KB Homes (NYSE:KBH) reported better-than-expected earnings this morning. Actually I should say the homebuilders loss wasn’t as bad as analysts feared. KB lost just $58 million or $0.75 a share in its first quarter, which (strangely) ended on Feb. 28.  

That’s a lot better than KB’s first quarter from 2008. The company managed to lose $268 million then. Of course, some of that loss is write-downs of unsold home values. It’s possible that some of that loss is recovered, one day. KB Homes is in decent financial shape with over $1 billion in cash.  

I bring this up because Daily Profit recommended Hovnanian Enterprises (NYSE:HOV) earlier this week. On a valuation basis, Hovnanian is far cheaper than KB Homes. Hovnanian has a market cap of just $133 million on $2.6 billion in revenues. Clearly, that means there’s more risk in Hovnanian. There’s also more upside.  

The risk for Hovnanian is debt. Hovnanian’s debt is about 3 times its cash. At KB Homes, that ratio is less than 2.  

I’m using $1.52 as the Daily Profit entry point for Hovnanian.   

*****The TradeMaster Daily Stock Alerts video conference "How to Swing Trade a Bear Market" aired Wednesday night. If you’ve got some down time this weekend and feel like getting TradeMaster technical analyst Jason Cimpl’s views on the stock market, here’s a LINK where you can access a replay of the video. 

That’s it for today.  Have a great weekend.