4 downgrades hit home builder sector

Single-family housing starts have dropped, interrupting a rise in confidence.

By TheStreet Staff Dec 19, 2012 3:07PM

Home under construction copyright CorbisBy Richard Suttmeierthestreet logo

 

On Tuesday we learned that the National Association of Home Builders Housing Market Index rose another two points to 47 in December.

 

This was the eighth consecutive monthly gain to the highest level since April 2006, but the index has been below the neutral reading of 50 since May 2006.

 

While data for the housing market continues to improve, overly tight mortgage lending standards are preventing many families from buying a new home. The component of the HMI that measures "traffic of prospective buyers" increased by just one point to 36.

 

The NAHB HMI peaked at 72 in June 2005, and the home builder stock bubble popped in July 2005. The record low for the HMI was 8, set in January 2009, and the home builder stocks bottomed with the broader market in the first week of March 2009.

 

Wednesday morning we learned that housing starts declined 3.0% in November to an annual rate of 861,000 units. The important single-family starts fell 4.1% to a 565,000 annual pace.

 

Notice on the graph below that the rise in the Housing Market Index is way ahead of the rise in new single family starts, which fell back below 600,000 in November (not shown).

chart 1

With the Santa Claus rally gathering momentum this week stocks have become less attractive  fundamentally. At www.ValuEngine.com we show that 50.3% of all stocks are undervalued, which means that 49.7% are overvalued. Twelve of 16 sectors are overvalued, eight by double-digit percentages led by the construction sector, which is overvalued by 20.2%. The building-residential and commercial industry is overvalued by a staggering 35.3%. Six of the eight home builder stocks I track are overvalued by 25% or more.

 

The last time I profiled these home builders was on Nov. 28 in Homebuilders Are Risky Bets Despite Positive Data, and since then four of the eight have been downgraded by ValuEngine.

As I mentioned on Nov. 28, the home builder stocks had been moving sideways since the middle of September, but that changed this week as the PHLX Housing Sector Index (HGX) broke out of that trading range, led by four of the eight stocks profiled today.

 

The daily chart for HGX (172.69) shows rising momentum with the index above its 21-day, 50-day and 200-day simple moving averages at 164.55, 163.48 and 141.50. HGX is up 134.5% since the October 2011 low and is up 67.8% year to date. HGX crossed my monthly pivot at 166.82 this week, and I show a projected monthly risky level at 173.86 in Jan 2013. This week's value level is 159.16.

 

chart 2

 

Reading the Table

 

Table

 

OV/UN Valued: The 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 are projected to move higher by that percentage over the next 12 months.

Value Level: The 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 timeframe noted.

Risky Level: The price at which to enter a GTC Limit Order to sell on strength.

 

D.R. Horton (DHI) ($20.08 vs. $19.58 on Nov. 28) still has a buy rating even though the stock is 25% overvalued with an elevated 12-month trailing price-to-earnings ratio at 25.4. DHI tested its 50-day SMA at $20.07 on Tuesday with its Sept. 21 high at $22.79. My quarterly value level is $18.11 with monthly risky level at $22.26.

 

Hovnanian (HOV) ($6.05 vs. $5.49 on Nov. 28) has had a double-downgrade to strong sell from hold since Nov. 28, and is projected to decline by 22.6% over the next 12 months. HOV set a new multi-year high at $6.10 on Tuesday. After a gain of 351.5% over the last 12 months and given the downgrade, this stock has become a MOJO play only.

 

KB Home (KBH) ($17.00 vs. $14.61 on Nov. 28) has been downgraded to hold from buy since that Nov 28 post. After a gain of 138.8% over the last 12 months this stock has become a pure momentum play as the stock approaches its multi-year high of $17.30 set on Oct 19.

 

Lennar Corp (LEN) ($39.71 vs. $38.72 on Nov. 28) still has a buy rating, is 60.6% overvalued and up 112.8% over the last 12 months with a P/E of 37.1. My weekly value level is $36.07 with a monthly pivot at $38.58 and annual risky level at $44.87. The stock set a new multi-year high at $39.72 on Tuesday.

 

Pulte Group (PHM) ($18.61 vs. $17.11 on Nov. 28) has been downgraded to buy from strong buy since Nov. 28, is 27.4% overvalued after gaining 223.1% over the last 12 months. The stock has a trailing 12-month P/E at 30.9. My weekly value level is $15.82 with a monthly pivot at $18.11 and annual risky level at $26.56. The stock set a new multi-year high at $18.71 on Tuesday.

 

Ryland Group (RYL) ($37.39 vs. $33.72 on Nov. 28) still has a buy rating, is 17.8% overvalued after a gain of 162.0% over the last 12 months. The stock has a trailing 12 month P/E of 58.4. My weekly value level is $34.18 with a monthly pivot at $36.70 and annual risky level at $49.02. The stock set a new multi-year high at $37.50 on Tuesday.

 

Standard & Pacific (SPF) ($7.23 vs. $6.90 on Nov. 28) has been downgraded to hold from buy since Nov 28. The stock is 46.0% overvalued after gaining 151.0% over the last 12 months and has a P/E of 44.3. My weekly value level is $5.65 with a monthly risky level at $7.95. The stock failed at $7.90 three times: Sept. 21, Oct. 17 and Oct. 25.

 

Toll Brothers (TOL) ($32.51 vs. $32.11 on Nov. 28) still has a buy rating, is 26.9% overvalued after gaining 65.4% over the last 12 months. The stock has a 12-month trailing P/E ratio of 50.7. My annual value level is $29.30 with a monthly risky level at $36.95. TOL is lagging its multi-year high of $37.08 set on Sept. 21.

 

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

 

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2Comments
Dec 19, 2012 6:29PM
avatar
Gee...wasn't just a week or so ago all the "experts" were saying how great the new home construction market was?  These guys are clueless.  I will admit however, there are signs of improving but if we enact legislation that eliminates the ability to write off the interest on your mortgage, or we tax the gain of selling a home to help pay for Obamacare then it will dampen any momentum that may have been created.  Until we create good paying sustainable full-time jobs, people will sit on the sidelines and only be renters as there is no other option.
Dec 19, 2012 8:01PM
avatar

Seems to me all that good news just a few weeks ago was just BS by the media and the Government playing with statistics to create a feel good enviornment.

 

Maybe when Pulte gets back to $7 a share will be a good time to buy....maybe.

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