Overvalued Home Builders Face Earnings Hurdle

NEW YORK (TheStreet) -- On Wednesday the National Association of Home Builders released its Housing Market Index for January with an unchanged reading at 47, ending the winning streak at eight consecutive months and below the neutral 50.

The NAHB indicates that conditions in the housing market are much better than they were a year ago with an increasing number of geographic markets showing signs of recovery. The pending fiscal cliff was blamed for a pause in this improving climate. The possibility that Congress may limit the mortgage interest rate deduction is a growing concern for the home builders. The same difficulties continue to impede the housing recovery; persistently tight mortgage credit conditions, and difficulties in obtaining accurate appraisals.

On Wednesday afternoon the Federal Reserve Beige book indicated that residential construction expanded or held steady in eight of 12 Federal Reserve Districts, which correlates with the pause in the NAHB HMI survey.

This morning we learned that housing starts rose 12.1% in December to an annual rate of 954,000 units with the important single family starts up 8.1% to an annual rate of 616,000. This better-than-expected data still lags the rise in the NAHB HMI. This new family starts data is not in the graph.

When I wrote 4 Downgrades Hit Home Builder Sector on Dec. 19, 50.3% of all stocks were undervalued according to www.ValuEngine.com. Today this measure is down to 43.5%. On Dec. 19 we showed that 12 of 16 sectors were overvalued and today all 16 are overvalued, eight by double-digit percentages. The consumer staples sector is the most overvalued by 24.6% with construction in second place at 19.2% overvalued.

I have been tracking the PHLX Housing Sector Index ( HGX) as my benchmark for the construction sector, and HGX has overbought daily and weekly chart profiles.

The daily chart for HGX (181.42) shows this index well above its 21-day, 50-day and 200-day simple moving averages at 175.66, 168.26 and 146.19 after setting another multi-year high at 183.82 on Jan. 9. My semiannual value level is 152.09 with a monthly pivot at 175.89 and weekly risky level at 186.50. HGX is up 5.9% so far in 2013 setting a multi-year high at 183.82 on Jan. 9. HGX is up 146.3% since its October 2011 low.

Chart Courtesy of Thomson/Reuters

Reading the Table

OV/UN Valued: 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 12 months. Stocks with a black number increased by that percentage.

Forecast 1-Year Return: Stocks with a red number are projected to decline by that percentage over the next 12 months. Stocks with a black number in the table are projected to move higher by that percentage over the next 12 months.

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.

Among the eight home builders profiled today four are rated buy and four are rated hold, as one was downgraded to hold from buy since Dec. 19. All eight stocks are overvalued with seven overvalued by double-digit percentages between 18.1% and 56.3%. All eight have had significant double-digit gains over the last 12 months between 53.1% and 155.3%. The maximum projected gain over the next 12 months is only 8.7%. The six with 12-month trailing price-to-earnings ratios have extremely elevated P/Es by historical standards for home builders between 26.1 and 48.1.

D R Horton ( DHI) ($21.00 vs. $20.08 on Dec. 19): Still has a buy rating with its Sept. 21 high at $22.79. The daily chart is overbought with the weekly chart positive with the stock above its five-week modified moving average at $20.21. My quarterly value level is $18.86 with a semiannual pivot at $20.50 and monthly risky level at $21.92.

Hovnanian ( HOV) ($6.00 vs. $6.05 on Dec. 19): Had a double downgrade to strong sell before my Dec. 19 post and then the stock fell from a multi-year high at $7.43 on Jan. 2 to $6.00 with the stock now hold rated. The daily chart is negative and the weekly chart shifts to negative on a close this week below the five-week MMA at $5.96. My quarterly value level lags at $2.89 with a semiannual pivot at $6.00 and monthly risky level at $6.22.

KB Home ( KBH) ($16.15 vs. $17.00 on Dec. 19): Still has a hold rating and a multi-year high of $17.30 set on Oct. 19. KBH reported its quarterly results back on Dec. 20 and missed EPS estimates by three cents with an EPS of three cents. The daily chart profile shows declining momentum and the weekly chart is positive with the five-week MMA at $15.61. My semiannual value level lags at $10.77 with my monthly risky level at $16.57.

Lennar ( LEN) ($40.52 vs. $39.71 on Dec. 19): Still has a buy rating after setting a multi-year high at $42.00 on Jan. 9. The daily chart has a negative divergence in momentum despite reporting a better than expected EPS at 56 cents on Jan. 15. The weekly chart is positive with the five-week MMA at $38.97. My semiannual value level is $36.03 with a monthly pivot at $40.58 and weekly risky level at $41.41.

Pulte Group ( PHM) ($19.34 vs. $18.61 on Dec. 19): Still has a buy rating and set a multi-year high at $19.80 on Jan. 9. The daily chart is positive but overbought with a positive but overbought weekly chart and with the five-week MMA at $18.13. My annual value level is $14.00 with a monthly pivot at $19.27 and weekly risky level at $20.09.

Ryland Group ( RYL) ($38.31 vs. $37.39 on Dec. 19): Has been downgraded to hold from buy and set a multi-year high at $39.22 on Jan. 9. The daily chart has a negative divergence in momentum with a positive weekly chart and the five-week MMA at $35.97. My quarterly value level is $28.90 with a monthly pivot at $37.26 and a weekly risky level at $38.49.

Standard & Pacific ( SPF) ($7.80 vs. $7.23 on Dec. 19): Still has a hold rating after setting a multi-year high at $8.08 on Jan. 9. The daily chart shows a negative divergence in momentum with a positive weekly chart profile and the five-week MMA at $7.30. My semiannual value level is $7.36 with a weekly pivot at $7.80 and monthly risky level at $8.00.

Toll Brothers ( TOL) ($34.91 vs. $32.51 on Dec. 19): Still has a buy rating with the stock below its multi-year high of $37.08 set on Sept. 21. The daily chart profile is overbought with a positive weekly chart profile and the five-week MMA at $33.05. My annual value level is $31.95 with a weekly pivot at $33.79 and monthly risky level at $37.19.

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

This article is commentary 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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