Homebuilders in the Sweet Spot

 | Oct 21, 2012 | 5:30 PM EDT
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Recent earnings in the tech space have left a lot to be desired, and have put the Nasdaq Composite and Nasdaq 100 in vulnerable positions. First it was IBM (IBM); then it was Google (GOOG). Who knows what Facebook (FB), Apple (AAPL) and Amazon (AMZN) will say this week, when all three are scheduled to report earnings? The market remains skeptical about Facebook's growth strategy going forward, and there have been big sellers in Apple since late September as investors have likewise questioned growth prospects here.

The good news is that several decent technical setups remain outside of the technology sector. The question is: Will fresh institutional money come in from the sidelines between now and the end of the year? Clearly third-quarter earnings season has been a big disappointment so far. Hopefully the headline flow will improve over the next few weeks.

Homebuilder stocks were unfazed by the selling in the broad market Friday -- another impressive performance by a group that's been running higher for a while now. Data on housing starts and building permits smashed expectations last week. New housing starts spiked in September, rising to 872,000 from 758,000 in August -- the most since July 2008. On Friday, existing-home sales disappointed but the builders held up well. Many ended higher on a day when the Nasdaq Composite slumped 2.2% and the S&P 500 gave up 1.7%.

If you missed the recent run in the home builders, don't worry. Instead of chasing them when most are well past proper entry points, focus on ancillary plays -- firms that stand to benefit from a continued recovery in the housing market.

Fortune Brands Home & Security (FBHS), spun off by Fortune Brands (FO) a little over a year ago, could still be in the early stages of a move, and shares remain under accumulation. The company has market capitalization of $3.1 billion, and it sells home-security, kitchen and bath and tool-storage products for the homebuilding market. Some of its brands include Master Lock and Moen faucets. 

Expect strong numbers from the company Tuesday after the close, when it's set to reports earnings. The company is expected to earn $0.25 a share, up 32% from a year earlier, with sales seen up 6% to $899.6 million. In 2011, FBHS earned $0.60 a share. This year, the Thomson Reuters consensus estimate calls for profit of $0.84 a share, which would be a 40% rise from 2011. Next year earnings are targeted to come in at $1.1, or 34% higher than current 2012 estimates.

FBHS share are firming up at their 10-week moving average for the first time after they cleared a base in August. It's just the kind of supporting action you want to see after a breakout. On a weekly chart, the 10-week moving average is an area where institutional investors will often come in and add to a position. The stock is within buying range, but it's a risky buy, not only because earnings are right around the corner but also because the major averages are in downtrends. A negative market tide tends to eventually bring everything down with it.

Fortune Brands Home & Security (FBHS) -- Weekly
Source: StockCharts.com

Meanwhile, SPDR S&P Homebuilders ETF (XHB) is showing similar technical action. After a technical breakout in mid-August, the stock is firming up at its 10-week moving average for the first time. This is within buying range as well. XHB's name might lead many to believe it's a pure play homebuilder ETF, but it is not. Only two homebuilders are inside the fund's top-10 holdings: PulteGroup (PHM) and Lennar (LEN).

XHB -- Weekly
Source: StockCharts.com

Lowe's (LOW) and Williams Sonoma (WSM) are the two highest-weighted stocks in the fund at 3.79% and 3.6%, respectively.

Ken Shreve got his start in the financial markets with Investor's Business Daily (IBD). He spent over 10 years as an editor and columnist for IBD and its Web site Investors.com.  He also acted as the Investors.com "Market Wrap" anchor and presented IBD investing workshops and seminars nationwide. He continues to provide market commentary on national radio and has appeared on CNBC. He now writes Ultimate Growth Stocks, a weekly newsletter at TFNN and hosts Breakout Investing, Monday through Friday from 3-4 PT. Learn more at www.kenshreve.com.

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