DR Horton, Pulte, Ryland, Toll Bros, Hovnanian Risk Overbuilding Homes on Spec

 

NEW YORK (TheStreet) -- The demand for new single-family homes is a key to stronger economic growth on Main Street, USA. In my judgment, and based upon the data I provide in this post, homebuilders are overbuilding new single-family homes, which will be difficult to convert to new home sales.

DR Horton (DHI) , Pulte Group (PHM) and Ryland Group (RYL) are profiled because they missed their latest quarterly earnings reported between July 24 and July 31.

I chose Toll Brothers (TOL) as the stock declined even though the company beat analysts earnings-per-share estimates on Sept. 3.

The fifth homebuilder is Hovnanian (HOV) , which reported an EPS beat on Thursday but the stock is down 35% for the year to date.

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These homebuilders are among the 19 components of the PHLX Housing Sector Index, which is down 2.1% year to date. All five homebuilders profiled today are underperforming the index.

Let's take a look at the weekly chart of the housing sector index.

Courtesy of MetaStock Xenith

The weekly chart for the housing index (199.00) clearly illustrates what I have been calling the 60% housing recovery. The housing index peaked at 293.66 set in July 2005, a year before the housing bubble peaked. Compared to the S&P 500 this index is still down 32% since its high, while the S&P 500 is 27% above its October 2007 high.

The weekly chart shows the Fibonacci retracement of the 82% decline from its July 2005 to its March 2009 low at 54.31. The housing index has been trading back and forth around the 61.8% retracement at 202.05 since May 2013. The technicals thus support my call of a 60% housing recovery.

The National Association of Homebuilders Housing Market Index, which scales between zero and 100 is at 55 above the neutral 50 reading but is below the 60 threshold.

Single-family starts rose b y 8.3% to an annual pace of 656,000 units in July continuing to oscillate around the 600,000 threshold when the potential is 1 million to 1.2 million. This is another indication of a 60% housing recovery.

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While single-family starts are rising new home sales have declined. The annual rate of new home sales fell 2.4% in July to 412,000 units. New home sales are sales only from community developments, while single-family starts include homes built in lots not in developments.

The decline of new home sales came as a surprise to the NAHB, which stated that builders were increasing inventories in anticipation that future sales will increase. It says there is pent-up demand for new homes as consumer confidence improves, given low mortgage rates and renewed job growth.

When I wrote about community banks on Sept. 3 I mentioned two statistics from the FDIC Quarterly Banking Profile for the second quarter that are fueling the building of homes on speculation. Unused construction and development loan commitments increased 7% year over year to $61 billion. Since the first quarter of 2013 C&D loans are up 11% to $223.2 billion.

There are conflicting surveys related to consumer confidence and the quality of the job growth.

The August reading of the Conference Board's consumer confidence index rose to 92.4, the highest reading since October 2007, but this is at the lower end of the 90 to 110 range considered neutral.

The U.S. Conference of Mayors released a survey recently comparing the jobs lost during the recession to the 8.7 million jobs created during the so-called recovery. They say the average salary of the lost jobs was $61,637 versus $47,171 for the new jobs, down 23%. These Americans cannot avoid new homes!

A similar recent survey by Rutgers University shows that 61% of Americans think the recession exerted a permanent drag on the economy, more negative than five years ago.

A rising supply of existing homes is competing with demand for new homes. The National Association of Realtors recently reported the inventory of existing homes for sale rose to 2.3 million units in June, up from a 13-year low of 1.8 million in January 2013. They also said that price gains are decelerating.

First-time homebuyers are a key to sustaining a growing housing market. Today, 28% of existing home sales are to first-time buyers down from a normal pace of 40%. Only 16% of new-home sales are to first-time buyers, the lowest in 15 years. This demographic has a higher than normal unemployment rate, weak wage growth and lower credit scores.

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The recent Case-Shiller 20-city index shows the declining rise in home prices with a year-over-year rise of 8.1%. The index is at 172.33 up from the March 2012 cycle low at 134.07, a rise of 28.5%, which in my opinion a re-inflated home-price bubble. The rise from 100.00 in the year 2000 to 134.07 is a rise of 34%, which appears to be back on the longer term up trend.

The first "crunching the numbers" table shows a confusing technical picture for the five homebuilders profiled today. All five are below their 50-day and 200-day simple moving averages and four of five are below their five-week modified moving averages. However, all five have the positive divergence on their weekly charts, rising 12x3x3 weekly slow stochastics.

The 12-month trailing price-to-earnings ratios are elevated by longer-term historical standards. At the highs in 2005 homebuilder P/E's were in the high single-digits. Homebuilders are not known as dividend stocks.

Here are the profiles, the "crunching the numbers" tables follows:

DR Horton ($21.36) traded to a 2014 intraday high at $25.23 on July 2 then fell like a rock after its earnings miss reported on July 24. The stock has been below its 200-day simple moving average since July 25 trading as low as $19.99 on August 7. This was followed a rebound and failed test of the 200-day at $22.07 on August 20, with this average now at $22.19.

I do not show a value level so the downside risk is to its 200-week simple moving average at $17.63. Semiannual and monthly risky levels are $23.01 and $23.06, respectively.

Hovnanian ($4.25) traded as high as $5.31 on June 30, just above its 200-day SMA then at $5.16. From there the stock traded as low as $3.75 on August 5 and closed Thursday below its 50-day SMA at $4.37.

The 200-week SMA is $3.97 with a monthly value level at $2.93 with semiannual risky levels at $4.68 and $5.04, which was tested at the high.

Pulte Group ($18.54) traded as high as $20.64 on July 2 then began a down trend to as low as $17.47 on August 7. During this journey the stock broke below its 200-day SMA at $19.03 on July 25 in reaction to missed EPS estimates. Strength between August 19 and August 29 was a failed test of the 200-day now at $19.23.

A semiannual value level is $16.15 with a monthly pivot at $18.47 and semiannual and quarterly risky levels at $20.51 and $26.81, respectively. The high was a test of the semiannual risky level.

Ryland Group ($36.44) traded up to a failed test of its 200-day SMA at $40.21 on July 1 then plunged to as low as $31.22 on July 31 before rebounding to $37.46 on August 25.

The 200-week SMA is $28.67 with a weekly value level at $32.69 and semiannual and quarterly risky levels at $44.96 and $52.27, respectively.

Toll Brothers ($33.71) traded as high as $37.61 on July 2 then slumped to as low as $32.34 on August 7 breaking below its 200-day SMA at $35.27 on July 24. The stock had been trading back and forth around its 200-day SMA at $35.53 since August 19, but then broke below it on Wednesday on a cautious outlook following an earnings beat.

The 200-week SMA is $28.34 with a weekly value level at $32.18 and monthly and semiannual risky levels at $34.80 and $35.71, respectively. The pre-earnings high was a test of the semiannual risky level.

Crunching the Numbers with Richard Suttmeier: Moving Averages & Stochastics

This table provides the technical status for the stocks profiled in today's report.

I show the 12-month trailing price to earnings ratios and dividend yields.

There are five columns with moving average titles: Five-Week Modified Moving Average, 21-Day Simple Moving Average, 50-Day Simple Moving Average, 200-Day Simple Moving Average and the 200-Week Simple Moving Average.

The column labeled 12x3x3 Weekly Slow Stochastics shows the pattern on each weekly chart with readings from Oversold, Rising, Overbought, Declining or Flat.

Interpretations: Stocks below a moving average are listed in red.

Five-Week Modified Moving Average (MMA) is one of two indicators that define whether or not a weekly chart profile is positive, neutral or negative. The other is the status of the 12x3x3 weekly slow stochastic.

A stock with a positive technical rating is above its five-week MMA with rising or overbought stochastics.

A stock with a negative technical rating is below its five-week MMA with declining or oversold stochastics.

A stock with a neutral technical rating has a profile that is not positive or negative.

The 200-Week Simple Moving Average (SMA) is considered a long-term technical support or resistance and as a "reversion to the mean" over a rolling three to five year horizon.

The 21-Day Simple Moving Average is a short-term technical support or resistance used by many hedge fund traders to adjust positions. A stock above its 21-day SMA will likely move higher over a rolling three to five day horizon and vice versa.

The 50-Day Simple Moving Average is also a technical support or resistance used by many strategists and commentators in financial TV.

The 200-Day Simple Moving Average is another technical support or resistance and I consider this level as a shorter-term "reversion to the mean" over a rolling six to 12 month horizon.

Crunching the Numbers with Richard Suttmeier: Earnings & Where to Buy & Where to Sell

This table presents the date the company reported EPS, the beat or miss of analysts estimates and the reported earnings per share, and where to buy on weakness and where to sell on strength.

EPS Date is the day the company reported or will report their quarterly results.

Beat / Miss - in red is a miss, in black is a beat. If blank the company has not reported quarterly results yet.

Reported EPS is the earnings per share reported for the last quarter. If the Beat / Miss is blank, this column is the analysts earnings per share estimate.

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Value Levels, Pivots and Risky Levels are calculated based upon the last nine weekly closes (W), nine monthly closes (M), nine quarterly closes (Q), nine semiannual closes (S) and nine annual closes (A). I have one column for pivots, which is a magnet for the period shown. The columns to the left of the pivots are first and second value levels. The columns to the right of the pivots are first and second risky levels.

Investors who wish to buy a stock should use a good-until-canceled GTC limit order to buy weakness to a value level. Investors who want to sell a stock should use a GTC limit order to sell strength to a risky level.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

Follow @Suttmeier

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


TheStreet Ratings team rates D R HORTON INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate D R HORTON INC (DHI) a BUY. This is driven by a number of 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 robust revenue growth, largely solid financial position with reasonable debt levels by most measures, reasonable valuation levels and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had sub par growth in net income." You can view the full analysis from the report here: DHI Ratings Report

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