Homebuilder Downgrades Cloud Earnings

NEW YORK (TheStreet) -- Homebuilder stocks have set tradable ranges since the PHLX Housing Sector Index (HGX) (195.73) set a multi-year high at 198.06 on March 20 the day after I wrote, Sell Downgrades Weaken Homebuilder Foundations.

From that high to the April 18 low of 174.43, HGX fell a quick 11.9%. On that day I wrote Homebuilder Upgrades Fortify Potential Sinkholes and provided fresh buy-and-trade parameters for the homebuilders I have been covering. On Monday HGX set a new multi-year high at $198.33, up a solid 13.7% from the April 18 low.

On March 19 I viewed the construction sector as a "source of funds" then upgraded the sector to underweight on April 18 with new buy-and-trade strategies. Today it's time to book gains on these trades.

The construction sector is the most overvalued sector at 17.9% overvalued. Of the 160 stocks in the sector there are 54 rated sell and 28 rated strong sell. With 51.2% of all stocks in the sector rated sell the sector still has an underweight rating.

Helping the sector has been better than expected earnings from D R Horton ( DHI), KB Home ( KBH), Lennar ( LEN), PulteGroup ( PHM) and Ryland Group ( RYL) with two more reporting quarterly results this week.

Last week we learned that new home sales rose 1.5% in March to a seasonally adjusted annual rate of 417,000. The National Association of Home Builders described this report as getting half-way back to a normal housing market.

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.

Reporting quarterly results before the open on Thursday is Beazer Homes ( BZH) ($16.38). This hold rated homebuilder set its 2013 high at $19.48 on Jan. 30. The weekly chart stays positive with a close this week above the five-week modified moving average at $15.93 with its 200-week simple moving average at $18.49. My annual value level is $13.95 with a weekly pivot at $16.54 and monthly risky level at $24.54.

D R Horton ($26.52 vs. $22.14 on April 18): Has been downgraded to sell from hold so it's time to book profits on this buy-and-trade strategy. The stock set a new multi-year high at $27.32 on Monday. The weekly chart is neutral with the five-week MMA at $23.82. My quarterly value level is $22.96 with a weekly pivot at $26.21 and the February 2007 high at $31.13.

Hovnanian ( HOV) ($5.56 vs. $4.98 on April 18): Maintained its buy rating with the stock rebounding from its 200-day SMA at $4.65 on April 18 to its 50-day SMA at $5.65 on Friday. The weekly chart shifts to positive with a close this week above its five-week MMA at $5.57. My weekly value level is $5.39 with my semiannual risky level at $6.00.

KB Home ($22.82 vs. $20.73 on April 18): Still has a hold rating and set a new multi-year high at $23.50 on Monday. The weekly chart remains positive but overbought with the five-week MMA at $20.98. My quarterly value level is $13.06 with a semiannual pivot at $22.95 and a weekly risky level at $24.28.

Lennar ($41.42 vs. $38.29 on April 18): Still has a hold rating but is below its multi-year high at $43.90 set on March 20. The weekly chart shifts to positive with a close this week above the five-week MMA at $40.51. My quarterly value level is $40.95 with a weekly risky level at $43.31.

Reporting quarterly results before the open on Thursday, MDC Holdings ( MDC) ($37.80): Has a hold rating but is well below its multi-year high at $42.41 set on Jan. 29. The weekly chart remains positive with a close this week above the five-week MMA at $36.75. My quarterly value level is $33.81 with an annual pivot at $37.06 and monthly risky level at $42.47.

Reporting after the close on Thursday, Mohawk Industries ( MHK) ($112.36): Has a hold rating and is below its multi-year high at $117.97 set on April 12. The weekly chart remains positive but overbought with a close this week above the five-week MMA at $111.05. My quarterly value level is $93.48 with a weekly risky level at $119.33.

PulteGroup ($21.21 vs. $18.26 on April 18): Has been downgraded to hold from buy with its multi-year high at $21.97 set on Jan. 28. The weekly chart stays positive with a close this week above the five-week MMA at $19.77. My quarterly value level is $17.40 with a weekly pivot at $20.95 and monthly risky level at $24.68.

Ryland Group ($45.03 vs. $38.15 on April 18): Has been downgraded to sell from hold after setting a new multi-year high at $46.25 on Monday so it's time to book profits on this buy-and-trade strategy. The weekly chart stays positive on a close this week above the five-week MMA at $40.37. My quarterly value level is $36.89 with a weekly risky level at $46.83.

Standard & Pacific ( SPF) ($9.23 vs. $8.01 on April 18): Has been downgraded to sell from hold after setting a new multi-year high at $9.38 on Monday. The weekly chart stays positive with a close this week above the five-week MMA at $8.52. My quarterly value level is $7.61 with a weekly pivot at $9.11 and monthly risky level at $9.47.

Toll Brothers ( TOL) ($34.19 vs. $31.56 on April 18): Still has a hold rating with its multi-year high at $38.36 set on Jan. 29. The weekly chart shifts to positive with a close this week above the five-week MMA at $33.69. My annual value level is $31.95 with a quarterly pivot at $34.31 and monthly risky level at $38.20.

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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