Meritage Homes (MTH) and many of its home-building peers have had a challenging year so far, and this is surprising with long-term interest rates trending downward and keeping mortgages very affordable. The group is in the bottom third of industries among the 250+ classified by the Zacks Rank.
And Meritage was one of the weak leaders, from an earnings momentum standpoint, right out of the gate. On January 8 when the stock was trading $47, it slipped to Zacks #4 Rank Sell. This week, it finally dropped to a #5 Strong Sell.
Here is the Price & Consensus chart which shows the downward estimate revisions leading the stock lower and keeping Zacks Rank users out of harms way for a 20%+ decline...
Housing Rebound Pauses
The housing market data this year has definitely taken on a slower pace of growth than the strong bullish readings we saw most of last year. And this is clearly reflected in the industry group's earnings momentum.
They run across the spectrum of the Zacks Rank but only one of 18 stocks is a #1 Rank Strong Buy. Toll Brothers (TOL) sports a #2 Buy, DR Horton, Pulte, and Lennar are all #3 Holds. And Hovnanian joins Meritage as a #5 Sell.
In a recent report on housing, JPMorgan analysts explained what must be the sentiment of many observers of the homebuilders, given their overall poor Zacks Rank...
'While we believe only moderate upside exists in the homebuilding sector, we see attractive relative value in the smaller-cap names. We expect the housing market recovery to continue to unfold in 2014, but we view the larger-cap builders' valuations as less compelling. The smaller-cap builders offer higher order growth rates and more attractive valuations.'
The truth is that for any of the builders to become a #1 or #2 Rank, their estimates would have to show a decent upward trend. The small caps can move the needle there in JPM's view. So if you are looking at housing stocks, keep an eye on the entire group and compare their Zacks Rank.
The smaller names that JPM likes and might stand out if their Rank improves are Ryland Group (RYL), KB Home (KBH), and Beazer Homes (BZH), all #3s right now. Meritage is on their list too. But that one has a long climb ahead right now.
Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.
BEAZER HOMES (BZH): Free Stock Analysis Report
MERITAGE HOMES (MTH): Free Stock Analysis Report
KB HOME (KBH): Free Stock Analysis Report
RYLAND GRP INC (RYL): Free Stock Analysis Report
TOLL BROTHERS (TOL): Free Stock Analysis Report
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