Homebuilders Upgraded On Weakness

TheStreet.com

NEW YORK (TheStreet) -- Most equity market strategists say the housing market should be the driver for an improving U.S. economy for the remainder of 2013 and beyond. Their theme is that rising home prices are a good thing, and that supply is low for both existing and new homes. In addition, mortgage rates remain low making homes affordable.

My theme is less optimistic with the housing market performing at half the pace of what the National Association of Home Builders (NAHB) defines as normal. The NAHB Housing Market Index at 44 remains below the neutral 50 reading.

The NAHB considers single-family housing starts the most important measure and the April data showed that this key statistic fell by 2.1% to an annual rate of 610,000, just above the key 600,000 level.

The NAHB has numerous concerns about the sustainability of the market for new home construction and sales including; the cost of building new homes is on the rise due to tightened supplies of materials, lots and labor. In addition, community banks remain reluctant to increase exposures to construction and development loans given a still elevated $201.6 billion exposure established during the housing bubble years.

The NAHB agrees with my assessment concluding that the market for new single family homes is "about half-way back to what could be considered a full recovery."

The supply of existing homes slowed as major banks delayed the foreclosure process as home prices rise. Banks have also slowed down sales of homes in the category "Other Real Estate Owned". At the end of the first quarter banks had an inventory of $35.9 billion in OREO properties, up 195.5% from the end of 2007. At some point this hidden supply will return to the market.


In addition, as home prices rise fewer homes are underwater territory vs. mortgage debt, which will increase the supply of existing homes on the market. More "For Sale" signs are up in my community in Tampa Bay.

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.

I covered the waves of downgrades for the homebuilders in three prior posts. On April 30 I wrote, Homebuilder Downgrades Cloud Earnings. This was followed by Don't Believe Stocks Are Still Cheap on May 10. Then on May 17 I noted additional downgrades in Homebuilders' Downgrades Continue.

Today my list of 11 homebuilders is dominated by upgrades, three to buy ratings.

Beazer Homes ($20.00 vs. $21.47 on May 17) was downgraded to sell on May 10, then to strong sell on May 17. Today Beazer has been upgraded back to hold. The stock peaked at $23.29 on May 10. My annual value level is $13.95 with a weekly risky level at $23.29.

DR Horton ($23.78 vs. $26.80 on May 17) was downgraded to sell on April 30, then to strong sell on May 17. Today DHI has been upgraded to buy. DR Horton peaked at $27.74 on May 15. My quarterly value level is $22.96 with a weekly risky level at $27.44.

Hovnanian ($6.05 vs. $5.99 on May 10) was downgraded to hold on May 10 and remains hold rated today. My weekly value level is $5.63 with a semiannual pivot at $6.00 and weekly risky level at $6.19.

KB Home ($21.50 vs. $23.88 on May 17) was downgraded to sell on May 17 and has been upgraded to buy today. KB Home traded to its 2013 high at $25.14 on May 15. My quarterly value level is $13.06 with an annual pivot at $22.95 and monthly risky level at $23.99.


Lennar ($39.23 vs. $42.40 on May 10) was downgraded to sell on May 9 and has been upgraded to hold today, and it tested its 200-day simple moving average (SMA) at $38.69 on Monday on a reversion to the mean. Lennar set its 2013 high at $44.40. My semiannual value level is $36.03 with a quarterly pivot at $40.95 and weekly risky level at $43.10.

MDC Holdings ($37.33 vs. $38.06 on May 10) was downgraded to sell on May 2 and has been upgraded to hold today. MDC traded as high as $40.93 on May 22 and tested its 200-day SMA at $37.28 on Monday on a reversion to the mean. My monthly value level is $36.26 with an annual pivot at $37.06 and weekly risky level at $40.03.

M/I Homes ($25.23) has been upgraded to hold and traded as high as $27.88 on May 20. My semiannual value level is $19.99 with a weekly risky level at $27.33.

PulteGroup ($21.32 vs. $23.35 on May 17) was downgraded to hold on April 30 then to sell on May 10, then to strong sell on May 17. Today the stock has been upgraded to buy. PulteGroup set a multi-year high at $24.47 on May 15. My quarterly value level is $17.40 with a monthly risky level at $23.75.

Ryland Group ($45.18 vs. $48.92 on May 17) was downgraded to sell on April 30 then to strong sell on May 17, then been upgraded to hold today. Ryland set a multi-year high at $50.42 on May 20. My quarterly value level is $36.89 with a monthly risky level at $49.22.

Standard & Pacific ($8.73 vs. $9.24 on May 17) was downgraded to sell on April 30 then to strong sell on May 17. Standard & Pacific set a multi-year high at $9.97 on May 14. My quarterly value level is $7.61 with a monthly risky level at $9.41.


Toll Brothers ($33.59 vs. $36.13 on May 17) was downgraded to sell on May 17 and has been upgraded to hold today. Toll Brothers set a multi-year high at $39.25 on May 22 and closed Monday just below its 200-day SMA at $33.95 on a reversion to the mean. My annual value level is $31.95 with a quarterly pivot at $34.31 and monthly risky level at $34.69.

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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