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Sell Downgrades Weaken Homebuilder Foundations

Stocks in this article: DHI HOV KBH LEN PHM RYL SPF TOL

Value Level: 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 time frame noted.

Risky Level: Price at which to enter a GTC limit order to sell on strength.

Notice from the table that the seven sell-rated homebuilders are overvalued by 25.6% to 76.6%. Over the last 12 months these stocks gained between 52.2% and 126.5%, but are projected to decline by 6.5% to 11.3% over the next 12 months.

Given the magnitude of the homebuilder downgrades a prudent investment strategy is to book profits on these stocks as a source of funds.

D R Horton (DHI) ($24.25 vs. $21.93 on Feb. 21): Downgraded to sell from buy and set a multi-year high at $24.76 on Friday. My semiannual value level is $20.50 with a monthly pivot at $22.89 and weekly risky level at $25.02.

Hovnanian (HOV) ($5.99 vs. $5.29 on Feb. 21): Downgraded to sell from buy and is well below its Jan. 2 high at $7.43. My weekly value level is $5.35 with a semiannual pivot at $6.00 and monthly risky level at $6.57.

KB Home (KBH) ($20.42 vs. $18.03 on Feb. 21): Downgraded to sell from hold and set a multi-year high at $20.76 on March 11. My semiannual value level lags at $10.77 with a monthly pivot at $20.69 and weekly risky level at $21.69.

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