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What homebuilders have in common with Apple

Home sales may have dropped more than expected last month but one strategist says the industry's charts are surprisingly starting to look a lot like Apple's.

Housing data may have disappointed the markets but one strategist says the homebuilder's ETF is starting to look like a stock that had a shaky 12 months: Apple.

December new home sales of 414,000 units represented a 7% fall compared to November's numbers disappointing economists' estimates of about 457,000. Meanwhile, December housing starts were down 9.8% compared to November (though up 1.6% compared to December 2012).

All this could mean trouble for two leading homebuilders, according to one investment bank's research team.

(Watch: New US home sales drop 7 percent, miss estimates)

Barclays predicts that while building products may see as surge as housing starts and home improvements increase, it won't translate to happy days for homebuilders.

In a report released Monday, Barclays analysts Stephen Kim, John Coyle, and Freda Zuo write:

 

"Following in last year’s footsteps, we think the homebuilding and building products companies will once again experience the ongoing housing recovery in very different ways. Overall, we see a significant correction underway between new home and existing home prices, homebuilder margins peaking out even as housing starts surge, and building products stocks once again outperforming the homebuilders."

The Barclays team forecasts housing starts at 1.15 million in 2014, moving up to 1.7 million by 2017. That will help flatten home prices over the next couple of years and they even see a 2% drop in home prices in 2016.

With that in mind, Barclays has downgraded luxury higher-end homebuilders Toll Brothers and KB Homes to "equal weight" from "overweight". Instead, they believe homebuilders like DR Horton, Lennar, and Meritage will outperform the rest of the category, though Barclays says, "We believe investors will fare better by limiting incremental investment to the building product names."

(Read: How to read a 10-K like Warren Buffett)

John Stephenson, portfolio manager at First Asset Investment Management, says investors should put up a "for sale" sign on their homebuilder stocks.

"These homebuilders were the stock to own in '12," says Stephenson. "In '13, they went absolutely nowhere. They're going to go absolutely nowhere in '14; time to get out."

However, Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, makes a surprising comparison between the charts of ISE Homebuilders ETF (RUF) and tech giant Apple.

"I think this is a really constructive chart," says Ross. "When I look at it, it reminds me a lot of Apple."

While Apple peaked above $700 per share in September 2012, the RUF topped out several months later in May at around $17.24.

According to Ross, the technical similarities between RUF and Apple include a big decline followed by a rounded base of support, after which there's a big breakout to the upside. Since July, Apple has rallied 39%.

 

Are homebuilders – particularly those in the luxury markets – already priced as high as they can go or is the industry another Apple waiting to happen? Watch the video above to see more discussion of homebuilders with Stephenson on the fundamentals and Ross on the technicals

 

 

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