NEW YORK (TheStreet) -- Homebuilder stocks jumped into focus this week on strong housing data.
XHB Year to Date Total Returns data by YCharts
Building permits rose to more than 1 million in October, the highest level since June 2008. Although most of the increase in October was explained by multi-family permits, which authorizes construction of apartments rather than single-family homes, analysts noted that there was underlying strength in the permit data.
KBW analysts pointed out that non-seasonally adjusted data showed an 7.4% monthly increase, so the data was not just affected by a higher seasonal adjustment factor. Trulia economist Jed Kolko said the three-month average of total building permits was also at a five-year high.
Meanwhile, the widely followed S&P/Case-Shiller Index reported a 13.3% annual increase in September, further bolstering home prices.
"We continue to favor large-cap builders based on valuation and balance sheet and note that they typically outperform small to midcaps earlier on in the seasonal trade," KBW analysts said in a report Wednesday.
According to KBW, historically, more than 75% of annual homebuilder returns are generated in the November-to-January time frame.
The analysts have outperform ratings on DR Horton (DHI) Lennar (LEN) and Toll Brothers (TOL)
-- Written by Shanthi Bharatwaj in New York.