The SPDR S&P Homebuilders ETF (XHB) has been trading at its best level since September 2008, right before the overall market meltdown.
Certainly, within the wider sector, builders themselves have rallied. Pulte Group (PHM), Lennar (LEN) and D.R. Horton (DHI) are just some of the names trading near 52-week (if not multiyear) highs. KB Home (KBH) and Ryland (RYL) are others showing promising technical action in recent weeks. In particular, Pulte and KB Home caught my attention by showing good price rebounds off their 10-week moving averages, although volume could have been more robust.
Some of the non-builder, housing-related stocks, however, actually boast better fundamentals behind their recent price gains, And a close look at the XHB components shows that top holdings include many non-builders.
The mattress stocks have been anything but sleepy lately, with both Tempur-Pedic and Select Comfort rallying to all-time highs. In addition to being in the same business and showing better-than-average technicals, there are other similarities. Both have posted strong records of revenue and earnings increases, and both have Wall Street analysts calling for double-digit earnings increases in the next two years.
So what does that mean for an investor looking to capitalize on follow-on opportunities from the builders' rally? I don't put the stocks of two nearly identical businesses in my portfolio at the same time. So it becomes a matter of choosing not only the stronger stock, but the one that best fits your risk tolerance and jibes with your existing holdings.
For example, Select Comfort is a small-cap, with a market capitalization of $1.8 billion. It trades around 1.1 million shares a day. That's not bad liquidity for a small-cap, considering that Tempur-Pedic only moves 1.8 million shares per day, despite having a market cap north of $5 billion.
At the moment, both stocks are extended from their most recent buy points, so I wouldn't be adding either today.
Stocks reaching new highs, however, are worth monitoring, because the recent history of price gains shows institutional confidence in the company and/or the stock. The next pullback (either with or without moving-average support) could offer a technical buy point as the stock emerges from the consolidation.
At this point, either stock would be a watch list candidate, in my view. Both have high betas -- Tempur-Pedics' is 1.41, and Select Comfort's is 1.65. Tempur-Pedic is next up with an earnings report, sometime in the second half of April, so that could be a catalyst for a move in that stock. But either stock could pull back prior to that and offer a new buy point between its previous high and the price at which it finds moving-average support.
Finally, recent IPO Mattress Firm (MFRM) is also showing potential, though its chart is quite different from those of its more established rivals. Sales growth has been strong in recent quarters, and Wall Street analysts expect some big things when it comes to earnings growth this year and next. The Houston-based retailer has 700 locations in 23 states, and is expanding rapidly.
The stock went public in November 2011 at $19 and was trading Friday just below $34, having pulled back from a high of $36.34, where it hit resistance in two straight sessions. It's getting support near its 20-day moving average, and the current pullback could offer an entry point once the stock regains that previous high.
It's important to note, however, that the company has not paused long enough -- that is, at least six or seven weeks -- to consolidate any of its earlier gains. A pullback of that length or more could be constructive, flushing out some early buyers who opt to take profits and clearing the way for a further price run-up.
The company reported its third quarter on Dec. 21, and has not announced a date for its next earnings release. Doing the math, however, it's likely to report very soon, perhaps even next week.
As a matter of risk management, I don't typically like to take a position ahead of earnings, as any disappointing components of a report can send a stock sharply lower. That's especially true of a small, thinly traded company such as Mattress Firm. A gap higher after the earnings could offer an opportunity to buy into strength, however, on the heels of the professional investors.