Prudently Prune Homebuilders

Premarket Thursday morning, Beazer Homes (BZH Quote) reported that quarterly profit rose 29% on higher sales in the Southeast, Arizona and Colorado. EPS was $2, above the consensus of $1.97. Beazer indicated that there was lower demand in overheated markets in Nevada and California. It also cited permit delays in Northern California and delays in the opening of new developments. Beazer reiterated its 2006 forecast of $10.50 per share, below the consensus of $10.64.

Beazer's stock has been the strongest among the homebuilders, reaching a new 52-week high of $82.14 on Jan. 11, but it's also the most overvalued, by 14.6%. Long-term investors should consider reducing holdings on strength to my quarterly pivot at $70.88. If it falls to my quarterly and semiannual value levels of $66.24 and $62.68, take the opportunity to add to long positions.

D.R. Horton (DHI Quote), the nation's largest homebuilder, said Thursday morning that its first-quarter profit grew 29% on improved sales and margins. The company reported EPS of 98 cents, beating the consensus of 94 cents. D.R. Horton upped its full-year EPS guidance to $5.25-$5.35 from $5.22-$5.32 per share.

Horton is trading 5% below its fair value. Investors should wait to add to positions on weakness to my semiannual value level of $35.26 and reduce positions if it rises to my quarterly risky level of $42.24.

Offsetting higher premarket prices for Beazer and Horton was weaker-than-expected housing data for December. Housing starts declined 8.9% to a 1.933 million annual rate, while building permits fell 4.4% to a 2.068 million annual rate. This supports my bias to reduce holdings and trade the ranges for the homebuilders.

The homebuilders are all rated a strong buy according to ValuEngine, but given the headwinds we've discussed, investors should add to holdings only on weakness to the value levels in the table below. Long-term investors should also consider booking some profits on strength to the risky levels. For example, if you had $10,000 invested in the homebuilders at the end of 2004, I would recommend realizing gains and bringing your allocation back to $10,000.

Key Metrics for the Homebuilders
The Homebuilders Company Name	Price	Rating	(-UV) / OV By	Fair Value	Value Levels	Pivots	Risky Levels
Beazer Homes	$77.59	S Buy	14.60%	$67.72	$66.24 Q / $62.68 S	$70.88 Q	$81.23 M
Centex	$75.89	S Buy	-0.90%	$76.55	$69.86 S / $61.24 A	$78.22 Q	$83.74 Q
DR Horton	$39.81	S Buy	-5.00%	$41.92	$35.26 S / $30.83 A	$37.80 S	$42.24 Q
KB Home	$78.66	S Buy	-3.60%	$81.62	$66.51 S / $59.59 A	$78.44 Q / $80.56 Q	$88.23 M
Lennar	$63.36	S Buy	-11.80%	$71.25	$57.35 A	$64.57 Q / $65.92 Q	$73.24 S
Pulte Homes	$41.92	S Buy	-12.70%	$48.03	$37.26 S / $34.88 A	$43.04 S	$49.90 Q
Ryland Group	$77.70	S Buy	-7.20%	$83.68	$70.16 A	$78.64 A / $78.96 Q	$99.48 S
Toll Brothers	$36.83	S Buy	-10.90%	$41.34	$29.99 A / $25.59 A	$36.98 S / $41.09 S	$49.40 Q
Source: Global Market Consultants