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Homebuilders Rebound On Permits and Higher Home Prices

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

NEW YORK ( TheStreet) -- Homebuilding remains an important component of an economic recovery. Before Tuesday's strong rebound the 11 homebuilder stocks I have been tracking were down between 7.3% and 26.6% since May 28. Beazer Homes (BZH - Get Report) which was upgraded to hold and had a one-month gain with a six-month loss. Ryland Group (RYL - Get Report) was down for the month.

On Tuesday, ValuEngine upgraded four names to hold from buy and one from strong sell to sell. Homebuilders rebounded on a stronger than expected reading for building permits in September and October and on higher prices that were reported in the S&P/Case-Shiller Home Price indices. Following Tuesday's rally the six month declines were cut to between 4.1% and 23.1%.

Since my last post on Oct. 31, Homebuilder Trading Opportunities Continue the biggest gainer has been Beazer Homes which was upgraded to hold and had a one-month gain of 12.5% with a six-month loss of 5%. Ryland Group as the worst performer since Oct. 30 with a decline of 5.8%.

The S&P/Case Shiller Home Price Indices showed that the 20-City Composite rose by 0.7% in September and was up 13.3% year over year. With the 20-City Composite up 23.6% since the March 2012 lows I would continue to argue that the housing bubble is re-inflating.

This table compares data from May 28 to the data from Nov. 26. All homebuilders are lower in price since May 28 by between 4.1% and 23.1%. Between May 28 and Nov. 26 the table shows that nine of 11 are significantly less overvalued today vs. six months ago with one now undervalued by 11.9%.

Remember those triple-digit 12 month gains? There gone! The best gain over the last 12 months is 40.9% and three now show 6.5% to 12.4% losses over the last 12 months.

The 12 month trailing price-to-earnings ratios are much lower today than six months ago, but keep in mind that historically homebuilder P/E ratios are in single-digit territory.

The homebuilders are in the construction sector which is 22.3% overvalued with the homebuilding industry just 11.5% overvalued. The construction sector is rated underweight with 49.7% of the 157 stocks in the sector rated sell or strong sell.

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