The slump in housing stocks to new four-year lows is hurting some well-known investors who recently added home builders and housing-related stocks such as KB Home and Pulte Homes to their positions.
Value investors such as Legg Mason's Bill Miller and Harris Associates' Bill Nygren, as well as other managers such as Tim Cohen of Fidelity Investments seem to have been caught in a "P/E trap," where these stocks were cheap for a long period and only went lower as the firms reported their earnings.
Now in the Dow Jones U.S. Home Construction Index, 10 of 15 stocks have no price-to-earnings (P/E) ratios because they have no earnings. A year ago, their P/E ratios were between three and 5.5, making them appear attractive.
"P/Es are tough when earnings change that fast," said Ron Muhlenkamp, a value investor and manager of the $2.3 billion Muhlenkamp Fund, which in the past owned more than $300 million of housing stocks. The fund was down 4.37 percent at the end of August against the S&P 500's 3.9 percent gain.
What's the PE?
"Last year, Meritage earned 10 bucks a share. This year they are likely to lose money. So what's the PE? Is it 2 or is it infinite?" said Muhlenkamp.