Trading what is, not what should be.
Here’s why we’e looking to get long homebuilders:
The Technicals:
Industry ETF ITB broke out of a nearly two-year base on strong volume last week. All charts posted below.
Last quarter, we watched one of our screen stocks Lennar Corp. (LEN), the strongest technically in its group, push higher up the right side of the base on decent institutional accumulation. The company is scheduled to report earnings Thursday, with analysts expecting full year 2014 earnings growth north of 45%.
Fundamentally:
We’re always looking for pockets of strength. There’s a generally pessimistic outlook for U.S. homebuilders with new building permits dropping 5.2% in November and low sales growth of 1% for new homes from a year ago as reported in December. BUT, not all parts of the country and segments are so saggy. AND, clearly there are companies out there performing quite well. It’s not so much the real estate sector we’re concerned with as much as the smaller markets that come together to create this broad label.
Professional money is entering this group. A focus on the strongest and fastest horses will increase the odds of success.
Four Strong Homebuilders
| Ticker | Company | Chart |
|---|---|---|
| KBH | KB Home | L-BASE |
| NVR | NVR, Inc. | BO |
| RYL | Ryland Group Inc. | L-BASE |
| WCIC | WCI Communities Inc. | BASE |
These four, as well as LEN, can be bought with a conservative, scale in strategy that respects stop losses. All four possess ROE’s of 15% or higher and EPS growth rates of 20% for the year. NVR, RYL and WCIC are predicted to grow EPS 20% or higher next year. NVR and RYL have grown their EPS at least 20% over the past five years, arguably making them more stable on this scale.
Monitor the performance breakout stocks LEN and RYL for indications of overall sector health.
Below is a list of 20 Homebuilder stocks with market caps of $300 million and higher:
| Ticker | Company | Sector |
|---|---|---|
| AVHI | AV Homes, Inc. | Industrial Goods |
| BZH | Beazer Homes USA Inc. | Industrial Goods |
| CVCO | Cavco Industries, Inc. | Industrial Goods |
| DHI | DR Horton Inc. | Industrial Goods |
| GFA | Gafisa S.A. | Industrial Goods |
| HOV | Hovnanian Enterprises Inc. | Industrial Goods |
| KBH | KB Home | Industrial Goods |
| LEN | Lennar Corp. | Industrial Goods |
| MDC | MDC Holdings Inc. | Industrial Goods |
| MHO | M/I Homes, Inc. | Industrial Goods |
| MTH | Meritage Homes Corporation | Industrial Goods |
| NVR | NVR, Inc. | Industrial Goods |
| PHM | PulteGroup, Inc. | Industrial Goods |
| RYL | Ryland Group Inc. | Industrial Goods |
| SPF | Standard Pacific Corp. | Industrial Goods |
| TMHC | Taylor Morrison Home Corporation | Industrial Goods |
| TOL | Toll Brothers Inc. | Industrial Goods |
| TPH | TRI Pointe Homes, Inc. | Industrial Goods |
| WCIC | WCI Communities Inc. | Industrial Goods |
| WLH | William Lyon Homes | Industrial Goods |
