A Tale of Two Homebuilders

During Thursday's show, Jim briefly compared the quarterly results of Hovnanian, the Sell Block's latest inmate, with the far superior quarter that Toll Brothers released. This comparison was tangentially related to the story, but I want to go into a little more depth than Jim has time for on the air about the comparison between these two quarters (it was the best of quarters, it was the worst of quarters).

In saying Hovnanian is a sell we're not condemning the homebuilders as a group – far from it. Although with the rally these stocks have had since the lows of July 15 – the HGX, the PHLX Housing Index, is up 29% since then, even after Thursday's horrible action, which took the index down 5% – you probably want to wait for a pullback, even more of one than we got Thursday, before buying.

Hovnanian, as you heard if you watched Thursday's show, reported an abysmal quarter, and even though that's not the biggest reason why we think the stock is a sell, the better-than-expected numbers from Toll Brothers put a more positive light on the homebuilding industry. Most homebuilders fall somewhere between Toll Brothers and Hovnanian, but here's the stark comparison between the best and the worst of the homebuilders.

Whereas Hovnanian missed earnings expectations by a mile, or about a dollar to be more specific, reporting a $2.67 per share loss versus the $1.68 loss the Street was looking for, Toll Brothers reported an 18 cent loss, or a 35 cent loss excluding write-downs, while the Street was expecting a 36 cent loss. That's the difference between a company that can still play the expectations game, Toll Brothers, and one that's completely out of control of its destiny, Hovnanian. But probably the most important figure is the cancellation rate, as homebuilders have been dogged by cancellations for the last two years. At Toll Brothers the rate fell from 24% to 19% year over year. At Hovnanian it fell from 35% to 32%. The swing at Toll Brothers was bigger, but they were also starting from a much better position. Hovnanian, with a 32% cancellation rate, isn't even where Toll Brothers was a year ago, with its 24% cancellation rate.

That's part of the reason why Hovnanian's stock got killed Thursday falling $1.35 or 17%, while Toll Brothers actually went up 27 cents or 1%. It's part of the reason why Hovnanian is barely more than two points above its 52-week low, while Toll Brothers is less than two points shy of its 52-week high. And yet Toll Brothers hasn't outperformed Hovnanian by all that much since the bottom on July 15: TOL is up 54%, while HOV is still up 45% from those lows. And yesterday, before the two quarters, Hovnanian was the outperformer.

You could own the worst house in a good neighborhood for the first part of the ride up, but at this point it's time to develop a more discriminating taste when it comes to the homebuilders.

Cliff Mason is the Senior Writer of CNBC's Mad Money w/Jim Cramer, and has been that program's primary writer, in cooperation with and under the supervision of Jim Cramer, since he began at CNBC as an intern during the summer of 2005. Mason was the author of a column at TheStreet.com during 2007, which he describes as "hilarious, if short-lived." He graduated from Harvard College in 2007. It was at Harvard that Mason learned to multi-task, mastering the art of seeming to pay attention to professors while writing scripts for Mad Money. Mason has co-written two books with Jim Cramer: Jim Cramer's Mad Money: Watch TV, Get Richand Stay Mad For Life: Get Rich, Stay Rich (Make Your Kids Even Richer). He is 100% responsible for any parts of either book that you did not like.

Mason has also had a fruitful relationship with Jim Cramer as his nephew for the last 23 years and will hopefully continue to hold that position for many more as long as he doesn't do anything to get himself kicked out of the family.

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the Mad Money website? madcap@cnbc.com