Homebuilder Upgrades Fortify Potential Sinkholes

TheStreet.com

NEW YORK (TheStreet) -- The housing market has been a bright spot for a slowly growing economy but in my judgment this spotlight has dimmed. My benchmark for the homebuilding industry is the PHLX Housing Sector Index (179.51) set a multi-year high at 198.06 on March 20 the day after I wrote, Sell Downgrades Weaken Homebuilder Foundations. HGX is down 9.4% since setting the multi-year high.

In the March 19 post I showed that seven of the eight homebuilder stocks I follow had been downgraded to sell with the eighth rated hold. Given the proliferation of sell ratings in this industry my suggestion was to book profits in these names as a "source of funds."


Today the seven homebuilders that were rated sell, have been upgraded; two to buy and five to hold. These upgrades fortify the sinkholes that weakened the homebuilder foundations at the March highs.

On Tuesday we learned that housing starts surged 7.0% in March to an annual rate above a million units for the first time since 2008, but this was on the strength of soaring production of multifamily properties. For the homebuilders the more important measure is single-family housing starts, which came in at an annual rate of 618,000 units, just above the 600,000 threshold deemed necessary to sustain the upward momentum for the market for new homes. As a warning, building permits fell 3.9% to an annual rate of 902,000 units.

A more important indicator was released on Monday, as the National Association of Home Builders (NAHB) reported that their Housing Market Index slipped to 42 from 44 in April as the spotlight dims below the neutral reading of 50.

Note that on the chart above shows that single family starts continue to lag the HMI. Homebuilders are getting frustrated by the rising cost of building materials and the difficultly in finding ideal land for development. These new concerns piggy-back on prior concerns of the lack of credit for construction and development loans, the difficulties in the mortgage market for qualified home buyers and lower than market appraisals for depressed properties.

Overall the construction sector is no bargain as the sector is 13.2% overvalued according to www.ValuEngine.com. There are 160 stocks in the sector with only 11 buy rated stocks. Even after the upgrades I present this morning, we show 39 sell rated stocks and 29 strong sell rated stocks. With 42.5% of stocks in sell categories, but given the upgrades shown today, I rate the construction sector an underweight up from avoid-source of funds.

Reading the Table

OV/UN Valued: Stocks with a red number are undervalued by this percentage. Those with a black number are overvalued by that percentage according to ValuEngine.

VE Rating: A "1-engine" rating is a strong sell, a "2-engine" rating is a sell, a "3-engine" rating is a hold, a "4-engine" rating is a buy and a "5-engine" rating is a strong buy.

Last 12-Month Return (%): Stocks with a red number declined by that percentage over the last 12 months. Stocks with a black number increased by that percentage.

Forecast 1-Year Return: Stocks with a red number are projected to decline by that percentage over the next 12 months. Stocks with a black number in the table are projected to move higher by that percentage over the next 12 months.

Value Level: Price at which to enter a GTC limit order to buy on weakness. The letters mean; W-weekly, M-monthly, Q-quarterly, S-semiannual and A-annual.

Pivot: A level between a value level and risky level that should be a magnet during the time frame noted.

Risky Level: Price at which to enter a GTC limit order to sell on strength.


D R Horton ($22.14 vs. $24.25 on March 19) has been upgraded to hold from sell. The multi-year high was set at $25.56 on March 20 giving investors the opportunity to book profits at my weekly risky level for that week at $25.02. The weekly chart shifted to negative on April 5 and stays negative with a close this week below the five-week modified moving average at $23.11. My semiannual value level is $20.50 with a quarterly pivot at $22.96 and monthly risky level at $25.56.

Hovnanian ($4.98 vs. $5.99 on March 19) has been upgraded to buy from sell with the stock well below its Jan. 2 high at $7.43. Investors had the opportunity to sell HOV above my semiannual pivot at $6.00 following my March 19 post. The weekly chart shifted to negative on March 29 and stays negative with a close this week below the five-week MMA at $5.55. My quarterly value level is $3.68 with my semiannual risky level at $6.00.

KB Home ($20.73 vs. $20.42 on March 19) has been upgraded to hold from sell and set a multi-year high at $22.67 on April 12. During the week of March 19 investors had the opportunity to sell this stock at its weekly risky level at $21.69. The weekly chart is still positive but overbought with the five-week MMA at $20.54. My quarterly value level is $13.06 with my semiannual risky level at $22.95.

Lennar ($38.29 vs. $41.58 on March 19) has been upgraded to hold from sell and set its multi-year high at $43.90 on March 20. Investors had the opportunity to book profits at my March monthly risky level at $42.27. The weekly chart has been negative since April 5 and stays negative with a close this week below the five-week MMA at $40.09. My semiannual value level is $36.03 with quarterly risky level at $40.95.

PulteGroup ($18.26 vs. $20.75 on March 19) has been upgraded to buy from sell with its multi-year high at $21.97 set on Jan 28. The weekly chart has been negative since April 5 and stays negative with a close this week below the five-week MMA at $19.43. My quarterly value level is $17.40 with a weekly pivot at $19.16 and monthly risky level at $24.68.

Ryland Group ($38.15 vs. $40.73 on March 19) has been upgraded to hold from sell and set a multi-year high at $43.00 on Jan 30. The weekly chart shifts to negative on a close this week below the five-week MMA at $39.25. My quarterly value level is $36.89 with a weekly risky level at $40.19.

Standard & Pacific ($8.01 vs. $8.65 on March 19) has been upgraded to hold from sell and set a multi-year high at $9.18 on March 20. The weekly chart shifts to negative on a close this week below the five-week MMA at $8.33. My semiannual value level is $7.36 with a quarterly pivot at $7.61 and weekly risky level at $8.69.

Toll Brothers ($31.56 vs. $34.12 on March 19) continues with a hold rating and its multi-year high at $38.36 on Jan. 29. The weekly chart has been negative since March 29 and stays negative with a close this week below the five-week MMA at $33.58. My semiannual value level is $24.50 with an annual pivot at $31.95 and quarterly risky level at $34.31.

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

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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