Positive housing data powers Pulte
Will the numbers yield long-term growth for the homebuilder?
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.
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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.
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The solid report comes a month after the retailer closed all of its Canadian operations.
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