Monday, September 8, 2008

Hopping on the Home Building Express

Much has been made about the comeback of the home builders in the last several days, especially today when Uncle Sam announced that he would step in and bail out the major mortgage lenders, Fannie Mae and Freddie Mac. Good thing, too, because if he didn't, there's no telling what the international ramifications of such a spectacular fallout might be. The news was greeted by joyous investors who showed their appreciation by buying stocks, pushing up the major averages by a couple of percentage points.

As you would expect, the home builders all responded to the good news by rocketing higher, with most gaining between 10%-20% in value—wow! The thing is, this rise wasn't entirely without precedence. In fact, the home building group has been in an uptrend since July 15th—that fateful day when all of the major markets experienced a turnaround. Up until then. the housing sector index, the HGX, was particularly hard hit, off 33% from recent highs compared with only 15% for the S&P 500. In many cases we that the harder they fall, the faster they rise, and so it is with many of the home builders.

Best of Breed
Fundamentally, the best stocks in this group are also the ones faring the best technically. One analyst today upgraded Lennar, D. R. Horton, and Toll Brothers--all three of which are posting impressive gains. According to the home building sector cognoscenti, Toll Brothers tops everyone's list as best of breed mainly due to the efforts of their talented CEO who has managed to keep inventories in-line and cancellation rates down, but I'll admit it's a head-scratcher as to why he recently sold 1.5 million shares of his own stock...unless he has so much that he wants to divest himself of some it. The company's product is targeted towards those with higher incomes which many see as being more resilient to market downturns—another plus for the company.

But Toll isn't the only company worth your consideration. All of the stocks listed below sport good fundamentals and have done exceptionally well since the middle of July. Not surprisingly, all of them broke out of their bases today, although many did it on ho-hum volume. The exceptions are Toll, D.R. Horton, Ryland, Pulte, and Champion.

The Good Guys
(Note: Stock symbol, current price, and dividend yield are in parentheses.)
Toll Brothers (TOL: $26: D/Y = 0): Broke to a new yearly high on three times normal volume.
Meritage Homes (MTH: $27: D/Y = 0): Also broke to a new yearly high but on less than normal volume.
Beazer Homes (BZH: $8.90: D/Y = 0): Broke out on half normal volume. Heavy resistance at $12.
D.R. Horton (DHI: $14: D/Y = 2%): Broke out on twice normal volume. Next resistance around $17.50.
Pulte Homes (PHM: $16: D/Y = 1%): Broke major $16 resistance on nearly three times normal volume. Minor resistance at $20.
Centex (CTX: $18: D/Y = 0.9%): Broke out on less than half normal volume. Heavy resistance at $20.
Lennar (LEN: $15; D/Y = 4.2%): Broke out on half normal volume. Minor resistance at $16.
Ryland (RYL: $26: D/Y = 1.8%): Broke out on more than twice normal volume. Resistance at $27.50 and $31.75.
Champion Ent. (CHB: $5.80: D/Y = 0): Not a homebuilder in the usual sense, the company is the third largest maker of factory-built housing. The stock has doubled in price since mid-July and doesn't face major resistance until the $8 level. This company represents the lower end of the housing market and that can't be a totally bad thing considering current economic conditions. Also, company insiders have been doing some heavy purchasing in recent weeks.

The Okay Folks
(Note: None of the below companies pay a dividend.)
NVR, Inc. (NVR: $620): A pricey stock with good fundamentals. It also broke out of its recent trading range today on twice normal volume. Heavy recent insider trading is a potential negative.
Hovnanian (HOV: $7.20): Although it traded on heavier than average volume, it couldn't quite break above $8 resistance. I'd wait to see if it can break that level.
M/I Homes (MHO: $19.50): Needs to break $20 resistance.

The Stinker
KBR, Inc. (KBR: $20): Currently testing its $20 support level (also it's all-time low). If it breaks through that, I'd put on a shorting strategy.

Other plays
If you don't want to play an individual stock, you could buy either of the home building ETFs—the ITB or the XHB. They sport similar charts but the XHB is more heavily traded than the ITB. The XHB also pays a bigger dividend (2.2% compared to 1.6%).

Note that the majority of these stocks are optionable for all of you options players. Covered calls in this market environment may be a rewarding strategy.

How to play this sector
Nobody really knows when the credit crisis will be over. From all of the articles I've read on the subject, many feel that further pain is yet to come. With this in mind, I certainly wouldn't be jumping into this group with both feet; perhaps taking quarter or half positions on market pull-backs. Speaking of pull-backs, the topping tails seen today on many of the above charts indicate that a breather is in order meaning we should see lower prices in the next few days.

In this case, patience will be rewarded.

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