Positive housing data powers Pulte

Will the numbers yield long-term growth for the homebuilder?

By Benzinga Jan 18, 2012 5:39PM

Image: Construction Workers Carrying Window (© Steve Hix/Somos Images/CorbisBy Gordon Wilcox, Benzinga Staff Writer

Shares of PulteGroup (PHM) surged nearly 6% Wednesday after positive housing data extended a now lengthy bullish run for the homebuilding sector at large. Maybe the housing bottom has finally arrived.

At least a case can be made for getting closer to that bottom and the ensuing rebound following Wednesday's bullish data. Applications for new home loans jumped 23.1% from the prior week, according to the MBA Mortgage Applications Survey. On top of that, the National Association of Home Builders/Wells Fargo housing market index soared four points to 25 in January, easily topping the reading of 22 economists expected.

That's the fourth straight increase, and it's good enough to be lighting a fire under shares of Pulte and its rivals. Not surprisingly, the past year has been a rough one for Pulte, with shares down 5.5% from a year earlier.

The following video discusses why homebuilders are gaining ground.

Post continues below.

Narrow the time horizon, and things look better. A lot better. In the past month, Pulte has soared 40%. In the past three months, shares have returned a staggering 81%. As is the case with other homebuilders, analysts have opined that Pulte could be ready to pull back. Last week, Guggenheim downgraded Pulte to "neutral" with an $8 price target.
The stock hit that level Wednesday before closing at $7.94. Looking at the chart, if $8 proves to be any resistance for Pulte, it would be more of the round number variety, not material resistance. Actually, the stock has a clear runway to challenge its 52-week high of more than $8.60.

The Risks: Pulte sports a forward P/E of 35.71, which is more than triple that of Apple (AAPL). Granted, that's obviously not an apples-to-apples comparison. Another risk regarding Pulte, besides valuation, could be that earlier this month, Goldman Sachs cautioned investors regarding the rally in homebuilders. Take that for what it's worth, but it should be noted that most of the marquee homebuilders, Pulte included, have climbed since Goldman's call.

Pulte has operations in approximately 60 markets throughout the country. A couple of years ago, that would have been a nail in the stock's coffin. Today, that type of market exposure could prove to be a good thing, especially when the NAHB tells the market that every region in its January survey saw increases.

Is Pulte overbought? Perhaps, but there are still potential catalysts to drive this stock higher and they may arrive as soon as Thursday. That's when the Commerce Department releases housing starts data for December. On Friday, the National Association of Realtors is set to release existing home sales figures for December.

Those might be the catalysts to permanently boost Pulte above $8.


Traders who believe that Pulte is in for more gains might want to consider the following trades:
  • iShares Dow Jones US Home Construction ETF (ITB) from the long side.
  • Long the SPDR S&P Homebuilders ETF (XHB).
  • Short the Direxion Daily Real Estate Bear 3X Shares (DRV).
Traders who believe that homebuilders will decline may consider alternative positions:
  • Long DRV.
  • Write covered calls on Pulte and Lennar (LEN).
  • Short XHB.
Neither Benzinga nor its staff offer investment advice, nor do they recommend that you buy, sell, or hold any security. 

More from Benzinga:
Jan 18, 2012 9:13PM
I think housing will continue to rebound. It seems likely that the Fed will come in with a form of QE3 that involve purchasing more MBS. The smart money like Bill Gross has already gotten into this trade. I think PHM is a good buy for the next 12 months.
Jan 18, 2012 9:14PM
I'm curious to see how if Home Depot and Lowes spike today as well?
Jan 19, 2012 9:47AM
I hate to say it, but I agree with the vampire squid. I don't trust this housing rally.
Jan 18, 2012 10:25PM
Yea Yea, I do not care about retail, though. Not interested in LOW, HD. What I do like is great insights on PHM.

PHM is up over 75% since mid-October and the chart is delicious. May add additional shorts thanks to the article - especially after an $8.5 resistance. Great job MSN.
Jan 18, 2012 9:10PM
I wonder if this is going to reflect on the economy in a bigger way than what we are expecting. I think the housing market is one of the things that could really turn the US around, especially with it being one of the key indicators of growth. Hopefully this signals good things to come. 
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