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  1. Home
  2. / Investing
  3. / Basic Materials

Good News Ahead for Homebuilders

Expect more outperformance from housing stocks in 2013.
By KEN SHREVE
Jan 31, 2013 | 09:30 AM EST
Stocks quotes in this article: ITB, RYL, DHI, LEN, SPF, PHM, MTH, MDC

With the iShares Dow Jones U.S. Home Construction (ITB) ETF up nearly 200% since October 2011, all the good news has to be priced into the homebuilders already, right?

Maybe not, if recent earnings reports have anything to do with it, more multiple expansion in the group could be in the cards.

Earlier this week DR Horton (DHI) reported solid results with earnings up 122% from a year ago to 20 cents a share. Sales rose 41% to $1.28 billion. The results handily beat the Thomson Reuters consensus estimate of 14 cents a share and sales of $1.1 billion.

While many homebuilders are too far extended past proper buy points to consider buying now, Horton is in a different boat. It staged a technical breakout in heavy volume Tuesday, soaring 11.8% to $23.82. Shares closed Wednesday at $23.06.

DR Horton (DHI)
View Chart » View in New Window »

As of Wednesday's close, it was 1.2% above a buy point its recent high of $22.79 -- still within buying range. It's generally not prudent to chase a stock when it moves more than 5% past a buy point.

Ryland Group (RYL) also reported stout numbers this week. Earnings surged 833% to 56 cents a share while sales jumped 68% to $440.1 million, also nicely above consensus. The stock sold on the news Wednesday, falling 2.6% to $40.24 after hitting an intraday high of $43.

Ryland's weak price action Wednesday shouldn't have come as a big surprise because going in it was extended 15% past its last buying area of $35.84.

Other builders that fall into the "extended," or too late to buy camp, are Lennar (LEN), Standard Pacific (SPF) and PulteGroup (PHM).

Three homebuilders are scheduled to report earnings before the open Thursday.

Meanwhile, MDC Holdings (MDC) is still in a base and hasn't broken out yet ahead of its earnings report. Look for profit of 40 cents a share with sales up 49% to $367.6 million.

Meanwhile, Meritage Homes (MTH) closed Wednesday just above a buying area of $43.02 but a breakout attempt hasn't gone anywhere because volume hasn't come into the stock yet. Analysts expect profit of 42 cents a share with sales up 45% to $355.4 million.

Finally, watch for earnings from PulteGroup on Thursday. The consensus estimate calls for profit of 31 cents a share, up 675% from a year ago with sales up 19% to $1.5 billion.

It's been a busy week of housing data. Earlier this week, December pending-home sales fell 4.3%, but the decline had more to do with tight supply rather than slack demand.

On Tuesday, the S&P/Case Shiller composite index of 20 metropolitan areas rose 0.6% in November, mostly in-line with estimates. Prices rose 5.5% from a year ago -- the 10th straight month where prices increased -- but prices are still about 30% below a bubble peak in 2006.

In sum, Horton is my favorite name in the builder group at this point. Its chart looks great and it's still within buying range. The iShares Dow Jones U.S. Home Construction is also interesting but I don't want to chase it here. If ITB pulls back to its 10-week moving in light volume and finds support around $21.60, that would be a more palatable entry point.

I'm expecting more outperformance from housing stocks in 2013. My Ultimate Growth Stocks model portfolio holds several other growth names with the potential to lead in 2013.

For a sample copy of my weekly newsletter, e-mail me at ken.shreve@thestreet.com.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication the author held no position in the stocks mentioned.

TAGS: Investing | U.S. Equity | Basic Materials

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