Few people think of homebuilders as consumer discretionary stocks, but that's the sector home of companies like D.R. Horton (DHI) and Pulte Group (PHM), both of which broke out of technical chart patterns last week.
As a sub-sector, homebuilders have been gradually recovering over the past few months, but the stocks' recent moves followed news that President Obama announced a plan to cut mortgage insurance for first-time home buyers, as well as some existing homeowners. The idea is to make home ownership more affordable for more.
Setting aside the myriad economic, political and societal concerns of that move -- and the looming question "Haven't we been here before?" -- the news certainly drove homebuilders' stocks higher.
As an asset class, homebuilders improved in 2014 vs. their 2013 finish, although you can't compare it with something like, oh, bitotechs or computer security specialists, for example. The sub-sector performed essentially in line with major U.S. indexes in 2014, finishing slightly lower than the S&P 500 and Nasdaq Composite.
So does the current technical strength, along with a promising industry development, mean homebuilders are a good bet for 2015?
If you've been reading my columns for a while, you can guess how I am going to answer that rhetorical question: no. In retirement accounts, or even in taxable accounts where you have earmarked the money to meet retirement expenses, I don't like betting on sectors, regions or single stocks unless it's in a portion of your portfolio where you can afford a little risk.
Most of my objection is because retail investors and professional asset managers alike are pretty bad at economic forecasting.
And that's where I have a problem on oversized bets on even promising sectors, such as homebuilders.
But say you want to carve out a speculative position.
Let's dissect the internals of the homebuilders' sub-sector. The largest companies, by market cap, are Lennar (LEN), D.R. Horton, Pulte, Toll Brothers (TOL) and NVR (NVR). But none of these truly fall under the definition of a large-cap stock because all have market caps below $10 million.
The charts of all these stocks are fairly similar, all having just broken out of areas of price consultation, or working on potential breakouts. Fundamentally, Toll Brothers and Lennar have posted the best earnings growth in recent quarters, although analysts expect Lennar to show more robust profit growth in the next couple of years.
One reason for Lennar's strong growth: significant operations in Texas, one of the hottest housing markets in the U.S. right now. (As an anecdotal aside in support of Texas housing strength, over the weekend I was chatting with an acquaintance who recently moved to Austin. She reports Manhattan-like demand for rentals. In other words, by the time a rental is listed and you call up to see it, it's off the market.)
Lennar is slated to report quarterly results before the bell on Thursday. For the year, analysts are eyeing an earnings increase of 47%. For this year, Wall Street sees a 21% gain in 2015. Analysts recently revised their estimates for both years to reflect higher expectations.
To state the obvious, all stocks are risky, but if you are going to put a single-stock equity overlay into your portfolio, I'd rather see you use larger stocks, rather than small. But with a sub-sector like housing, whose performance is dependent upon so many economic, demographic and even political variables, I'd say it's preferable to just pass, unless you view your position as completely speculative and not tied to any particular financial objective.