Beware D.R. Horton CEO's over-the-top quip

Aaron Pressman

Think stocks in the homebuilding sector are a beaten down value play? After all, the SPDRs S&P Homebuilding ETF fund (Symbol: XHB), which dropped 34% last summer, has since climbed more than 20%. Maybe the formerly crushed homebuilders finally are a great value find? Don’t count on it, at least not if you believe in one of the more psychological stock market indicators: the CEO expletive index.

Yesterday, Donald Tomnitz, CEO of D.R. Horton (DHI), flipped his lid speaking at a Citigroup investor conference. “I don’t want to be too sophisticated here, but 2007 is going to suck, all 12 months of the calendar year,” Tomnitz blurted out during a Q&A session. Might not be one of the seven dirty words you can’t say on television but shareholders should take note whenever the CEO loses his or her cool.

The all-time most famous incident of gruff-talking CEOs is of course Jeffrey Skilling berating hedge fund manager Richard Grubman back in 2001 with a word we can’t print in a family-friendly investment blog. Grubman had challenged Skilling over Enron’s failure to produce cash flow and balance sheet data in a timely fashion. Turns out Grubman was on to something in them there balance sheets and Skilling’s less-than-professional response was a leading indicator of Enron’s subsequent decline and fall.

Last May, the homebuilding industry itself got a taste of CEO swearing. Toll Brothers (TOL) chairman and CEO Robert Toll used an expletive on a conference call with analysts. In his opening remarks, Toll acknowledged some slowing of sales but said the trend was not “the beginning of hard times” but rather a “short-term phenomenon.” Peppered with questions from Wall Street’s finest, some of whom challenged Toll on his then-rosy outlook, the master builder responded to a question about inventory thusly: “I don’t think we have more than a handful of homes that are completed in the whole [expletive] industry.”

Let the record show that the day before Toll shares closed at $30.85. Less than three months later they dropped under $23, though they’ve since bounced back to the high 20’s. And while revenue was up 18% in that early 2005 quarter, in the most recent quarter revenue dropped 19% and full year earnings per share were forecast at $1.46 to $1.85, a steep drop from $4.17 in fiscal 2006. Toll himself is singing a different tune, as well. "There are too many soft markets at this stage of the selling season to call a general upturn," he told analysts on February 22. One later described the CEO's tone as "concerned and depressed." Perhaps that's the makings of another psychological indicator.

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