NEW YORK (TheStreet) -- KB Home (KBH) - Get Report reported fiscal third-quarter earnings this morning, and the stock fell more than 4% in early trading. When a stock declines, despite seemingly beating estimates, it illustrates the first of three key points of logic behind technical analysis.

First, technicians or chartists believe that the market is a discounting mechanism -- it is forward looking with stocks focused six to nine months ahead. Remember that the S&P 500 is part of the Leading Economic Indicator (LEI) series. Second, technicians believe that prices trend. Third, technicians believe that history tends to repeat itself.

With KBH declining, despite beating estimates, it tells us that investors in KBH are looking beyond the current news to what could impact KBH in the months ahead. Other housing names are showing bearish trends too. Look at Meritage Homes (MTH).

Image placeholder title

KBH peaked back in the first quarter of 2013 and again in the first quarter of 2014. See chart, above. Prices dipped under $12 earlier this year before rebounding. KBH peaked in late June and has traded irregularly lower since. While there is some chart support for KBH above $13 back in March, we cannot rule out a return to the $12 area considering the overall weak condition of the broad market.

Separately, TheStreet Ratings team rates KB HOME as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:

"We rate KB HOME (KBH) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity, reasonable valuation levels and good cash flow from operations. We feel its strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Despite its growing revenue, the company underperformed as compared with the industry average of 12.7%. Since the same quarter one year prior, revenues rose by 10.3%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Household Durables industry and the overall market, KB HOME's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • Net operating cash flow has significantly increased by 73.91% to -$86.99 million when compared to the same quarter last year. In addition, KB HOME has also vastly surpassed the industry average cash flow growth rate of -109.16%.
  • KB HOME has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, KB HOME increased its bottom line by earning $9.03 versus $0.41 in the prior year. For the next year, the market is expecting a contraction of 89.9% in earnings ($0.91 versus $9.03).
  • You can view the full analysis from the report here: KBH