Another Look at Homebuilder Stocks

NEW YORK ( TheStreet) -- Since my last post covering the housing market we have received additional data that show continued gradual improvement in homebuilding: New Home Sales last Thursday and the S&P /Case-Shiller Home Price indices on Tuesday.

Today I profile the 19 stocks in the PHLX Housing Market Index, or HGX.

Despite these data I continue to be cautious about the sustainability of the powerful rally in the homebuilder stocks.

In my Aug. 17 article on homebuilder stocks I talked about the rise in the NAHB Housing Market Index, or HMI, to 37, but also warned the index remained below its "normal" reading of 50. A reading above 50 is "good" and a reading below 50 is "poor."

I also wrote that the construction of single-family homes declined 6.5% in July and that this segment of the housing market represents 70% of the home construction market.

Last Thursday the latest data on new home sales were released. Sales of newly built single-family homes rose 3.6% in July to a seasonally adjusted annual rate of 372,000. The National Association of Home Builders viewed this release as positive indicating that prospective home buyers are looking to take advantage favorable prices and low mortgage rates. The NAHB expects this gradual upward trend to continue for the remainder of 2012.

I worry about this enthusiasm as the inventory of new homes declined to another record low at 142,000 units, as builders continue to see tight credit conditions for construction and development loans. This makes it tough for builders to begin construction of a home without a buyer's signed contract in hand.

Homebuilders would like to take better advantage of rising home prices. On Tuesday we learned that the S&P Case-Shiller 20-City Composite of home prices rose 0.5% year over year in June, was up 2.3% versus May, and up 6.0% in the second quarter versus the second quarter of 2011.

On Tuesday we also learned the Conference Board's reading on Consumer Confidence fell to 60.6 in August versus 65.9 in July. This measure correlates with the housing market and thus provides a warning for the sustainability of the rally for the home builder stocks.

Here's a chart of the Conference Board Consumer Confidence Index courtesy of dshort - Advisor Perspectives.

Fundamentally, the construction sector is overvalued by 4.8%, according to ValuEngine.com, with the Building-Residential/Commercial industry overvalued by 16.6%.This is another reason to consider booking profits on the homebuilder stocks.

Another warning for housing comes from the Mortgage Bankers Association, which reported Wednesday that its seasonally adjusted index of mortgage application activity, including both refinancing and home purchases fell by 4.3% in the week ended last Friday. Refinancing activity has now been lower for four weeks in a row, while loan requests for home purchases gained 1.4%.

The weekly chart for the PHLX Housing Sector Index (144.15) shown above shows overbought momentum (12x3x3 weekly slow stochastic) with a reading of 88.57 on a scale off 00.00 to 100.00, where readings above 80.00 are overbought.

The weekly chart stays positive with a close this Friday above its five-week modified moving average at 139.51. Note that the Aug. 27 high at 146.61 was a test of the 38.2% Fibonacci Retracement of the entire down trend from the July 2005 high to the March 2009 low. This retracement level is 145.52. My annual value level is 122.53 with quarterly and weekly pivots at 135.17 and 143.82, and monthly risky level at 152.09.

The above table shows data from www.ValuEngine.com covering the 19 components of HGX listed alphabetically from top to bottom.

Reading the Table

OV/UN Valued -- The stocks with a red number are undervalued by this percentage. Those with a black number are overvalued by that percentage according to ValuEngine.

VE Rating -- A "1-Engine" rating is a Strong Sell, a "2-Engine" rating is a Sell, a "3-Engine" rating is a Hold, a "4-Engine" rating is a Buy and a "5-Engine" rating is a Strong Buy.

Last 12-Month Return (%) -- Stocks with a Red number declined by that percentage over the last twelve months. Stocks with a Black number increased by that percentage.

Forecast One-Year Return -- Stocks with a Red number are projected to decline by that percentage over the next twelve months. Stocks with a Black number in the Table are projected to move higher by that percentage over the next twelve months.

Analysis of the PHLX Housing Sector Index

Looking at the overvalued/undervalued data, nine members of the HGX are undervalued and 10 are overvalued. The most overvalued stock is Lennar ( LEN) by 31%. The most undervalued stocks are Radian ( RDN) by 60.1% and Hovnanian ( HOV) by 55.5%.

HOV has a "2-Engine" Sell rating. Six stocks have "3-Engine" hold ratings. Twelve have "4-Engine" Buy rated; and I will profile the eight home builders with that Buy rating according to ValuEngine.

All 19 stocks in HGX are higher over the past twelve months by move than 12.5%, led by Pulte Group ( PHM), up by 196.4%.

HGX stocks are not cheap on a P/E basis as ten have ratios above 20.0. Back at the highs in 2005, many in the HGX had high single digit P/E ratios.

Here are profiles for the eight Buy rated home builders in the HGX according to www.ValuEngine.com

D R Horton ( DHI) ($18.62) traded to a multi-year high at $19.35 on July 24. My quarterly and annual value levels are $16.79 and $14.45 with a monthly risky level at $19.79.

Lennar ( LEN) ($32.27) traded to a multi-year high at $32.85 on Aug. 24h. My quarterly and semiannual value levels are $28.89 and $23.97 with a monthly risky level at $34.05.

MDC Holdings ( MDC) ($33.57) traded to a multi-year high at $34.74 on Aug. 22. My quarterly value level is $24.94 with an annual pivot at $32.81 and monthly risky level at $35.71.

M/I Homes ( MHO) ($18.39) traded to a multi-year high at $19.52 on Aug. 27. My quarterly value level is $16.05 with a monthly pivot at $18.57 and annual risky level at $23.18.

Meritage Homes ( MTH) ($36.06) traded to a multi-year high at $38.65 on Aug. 22. My semiannual value level is $29.82 with a quarterly pivot at $33.00 and monthly risky level at $36.60.

Pulte Group ( PHM) ($13.28) traded to a multi-year high at $13.91 on Aug. 17. My annual value level is $11.37 with a monthly pivot at $12.54 and annual risky level at $26.56.

Ryland Group ( RYL) ($26.01) traded to a multi-year high at $27.15 on July 10. My quarterly value level is $20.68 with a monthly risky level at $27.09.

Toll Brothers ( TOL) ($32.41) traded to a multi-year high at $33.68 on Aug. 22. My semiannual value level is $24.20 with annual and monthly pivots at $29.30 and $30.90 and annual risky level at $38.96.

At the time of publication the author had no positions in the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.

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