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Homebuilders Vulnerable in Current Market

Stocks in this article: BZH DHI TOL RYL HOV

The NAHB HMI index peaked at 72 in June 2005, which is when I predicted a peak in the share prices of the homebuilder stocks.

The index has been less than 50 since May 2006, and home prices peaked in June/July of 2006. The index hit a low of 8 in January 2009.

Anecdotally, homebuilders still talk about overly tight lending conditions for both the builders and the potential buyers of new homes.

With defaults and foreclosures on existing homes still elevated, home appraisals are dragged lower by short-sales and sales of bank-owned homes.

The weekly chart shown below for the Philadelphia Stock Exchange Housing Sector Index (^HGX) shows declining momentum (12x3x3 weekly slow stochastic).

The HGX is above its five-week modified moving average at 124.15. The weekly chart profile is thus neutral.

My annual value level is 122.53 with the downtrend resistance at 132.83.

The downtrend connects the highs of July 2005, January and April 2006, and February 2007. The HGX is up 23.6% year to date and 72.7% since its Oct. 4, 2011 low. It's down 5.4% since testing the downtrend on May 2, 2012.

Homebuilding stocks have been great performers since last October and so far this year.

If the NAHB Housing Market Index were at more than 50 instead of 29 and the inventory of new homes were on the rise, I would be more optimistic that the modest housing recovery can gather upward momentum.

Fundamental Screening and Value & Risky Levels for Nine Home Builders

Chart Courtesy of Thomson/Reuters

Nonetheless, I have profiled nine homebuilders. I have provided ValuEngine ratings and 12-month projected returns, as well as my value levels, pivots and risky levels.

This "buy and trade" strategy is used in the ValuTrader Model Portfolio available at www.ValuEngine.com. Click on the newsletters tab.

Beazer Homes (BZH) is rated a Strong Sell (1-Engine) according to ValuEngine, with 13.4% downside risk over the next 12 months. My quarterly value level is $2.48 with a monthly pivot at $3.94.

DR Horton (DHI) is rated a Buy (4-Engine) according to ValuEngine, with 9.2% upside potential over the next 12 months. My annual value level is $14.45 with a monthly risky level at $19.54.

Hovnanian Enterprises (HOV) is rated a Strong Sell (1-Engine) according to ValuEngine, with 18.7% downside risk over the next 12 months. My weekly value level is $2.04 with a monthly risky level at $2.71.

KB Home (KBH) is rated a Sell (2-Engine) according to ValuEngine with 6.3% downside risk over the next 12 months. My weekly value level is $7.85 with a monthly risky level at $10.49.

Lennar Corp. (LEN) is rated a Strong Buy (5-Engine) according to ValuEngine, with 13.4% upside potential over the next 12 months. My quarterly value level is $20.98 with a weekly pivot at $28.17, and monthly risky level at $32.90.

Pulte Group (PHM) is rated a Hold (3-Engine) according to ValuEngine, with just 4.0% upside potential over the next 12 months. My semiannual value level is $6.23 with a weekly pivot at $10.06 and annual risky level at 11.37.

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